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Perhaps you got some extra cash to invest—maybe a leftover $1,000 from your latest paycheck or a small company bonus—and now comes the big question: should you buy an individual stock, or put it into a mutual fund?
While both choices can help your money grow over time, the decision depends on your investing goals, risk tolerance, as well as how much time and effort you want to invest in managing your portfolio. In this article, we’ll explain the differences between mutual funds and stocks, outline the pros and cons of each, and give examples to help beginners make confident investment decisions.
Key Takeaways
- A mutual fund pools money from many investors to buy a mix of investments.
- Mutual funds offer instant diversification, lowering risk compared to stocks.
- Mutual funds are managed by professionals, making them easier for hands-off investors.
- Stocks may offer bigger gains but come with more risk and responsibility.
What’s the Difference Between a Mutual Fund and a Stock?
A stock represents ownership in a single company. When you buy a share, you’re betting on that company’s future performance. When a company performs well, its share price may increase, and it might even pay shareholders a part of its earnings (otherwise known as a dividend). However, while stocks can offer high returns, they also carry high risk since your investment can rise or fall dramatically based on factors such as poor company performance or negative market sentiment.
A mutual fund pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. Mutual funds are typically managed by professionals who research investments, monitor performance, and rebalance holdings to align with objectives. The goal is to outperform stock market indices, such as the S&P 500.
Here’s a table outlining the key differences between mutual funds and stocks:
| Feature | Mutual Funds | Stocks |
| Ownership | Fraction of a pooled portfolio | Direct ownership in a single company |
| Diversification | Instant, spreads risk | Limited to one company unless you buy multiple stocks |
| Management | Professional managers | You decide through your own research, including when to buy and sell |
| Risk | Lower individual risk | Higher potential risk |
| Fees | Ongoing management fees | One-time fee |
Why a Mutual Fund Might Be the Smarter Pick for Beginners
If you’re new to investing, there are several reasons why mutual funds often make more sense than buying a single stock.
- Diversification: A single mutual fund can hold a mix of different securities. This mitigates risk, so if one stock underperforms, the impact on your portfolio is smaller than it would be when invested in individual stocks.
- Professional management: Experienced fund managers conduct research and analysis to make informed investment decisions on your behalf.
- Simplicity: One purchase gives you access to an entire portfolio that’s managed for you. This means you don’t have to track dozens of individual stocks, earnings reports, or market news daily to maximize financial results.
- Consistency: While individual stocks may experience day-to-day volatility, mutual funds tend to be less risky.
Tip
You can hold both mutual funds and stocks—it doesn’t have to be one or the other.
A Side-by-Side Example
Let’s say you have $1,000 to invest in either a single stock or a mutual fund.
Option 1: Buy a single stock.
- You pick Company A and its stock rises 10% in a year: you gain $100.
- If it drops 10%, you lose $100.
Option 2: Buy a mutual fund.
- You invest the same $1,000 in a mutual fund that holds 50 different stocks.
- Some stocks rise, some fall, but overall the fund grows 8% on average in a year: you gain $80.
However, data shows some diversified funds provide better than average returns over time—some top performing funds such as the Fidelity Select Semiconductors Portfolio (FSELX) and the Fidelity Select Technology Portfolio (FSPTX) have net expense ratios of 0.62% each, and each fund yields an average annualized return of more than 20%. In comparison, U.S. small-cap stocks saw an average annual return of 12.37% in 2024.
It’s important to note that mutual fund expense ratios may slightly reduce returns, but the trade-off is professional management and lower risk. Be sure to investigate management fees before buying a specific mutual fund–even a small difference in fees can add up to a large return over time.
Important
A mutual fund or stock’s past performance doesn’t guarantee future results.
When You Might Prefer a Stock Instead
There are several reasons why buying an individual stock may be better for you:
- You want more control over your investments.
- You’re comfortable doing research or following a company closely to gauge results.
- You want to earn dividends.
- The stock is part of a broader, diversified portfolio that balances risk across other investments you may hold.
Overall, stocks may deliver higher returns, but they also carry higher risks if the company underperforms.
Are Mutual Funds Safer Than Stocks?
Mutual funds can mitigate risk, but they aren’t necessarily safer than stocks. Funds are made up of investments in many different companies, and all investments carry risk.
Can I Lose Money in a Mutual Fund?
Yes. Since mutual funds are made up of a diversified pool of stocks, bonds, and securities, their values can decline if the market drops. However, diversification typically limits the impact of market volatility when compared with individual stocks.
How Do I Pick the Right Mutual Fund for Me?
To choose the right mutual fund, consider your risk tolerance, financial goals, and time horizon. Then look at the fund’s historical performance and any applicable management fees to determine whether it’s a fit for your portfolio.
The Bottom Line
Mutual funds offer beginner investors a simple, diversified way to enter the market with professional guidance. Stocks can offer higher potential returns, but they require more research, attention, and a higher risk tolerance.
Understanding the trade-offs between mutual funds and individual stocks helps you make investment choices aligned with your goals, timeline, and risk tolerance. Starting with a mutual fund can provide a solid foundation for building wealth while minimizing stress, and it can serve as a stepping stone to learning more about individual stocks over time.
