Mutual funds versus stocks has ever been a questionable matter. While some like to take calculated risks with mutual fund investments, some others select to take the high risk road in order to get higher returns by investing in individual stocks.

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Author: Jim Knight
Comparing and Contrasting Mutual Funds and Stocks
Mutual funds versus stocks has ever been a questionable matter. While some like
to take calculated risks with mutual fund investments, some others select to take
the high risk road in order to get higher returns by investing in individual stocks.
In stock investing, the investor purchases shares in a future company through the
stock market. The investor seeks to get advantageous returns based on the
forecast growth of that particular company. If the company succeeds, the investor
succeeds; if is fails, the investor fails. This is the basic nature of stock investing.
Mutual fund investing, on the other hand, is an investment made in a collective
group of stocks, bonds, and securities in hopes that most of it will provide
important advantage returns to not only compensate for the shortcomings of the
stocks that did not accomplish, but return sufficient benefit in hopes of making
the mutual fund both lucrative and healthy. Investing in a mutual fund is in short,
an investment in both collective group of stocks and different other forms of
investment.
It is a truth that when a stock becomes available in the market it can be
considerably overpriced. Purchasing them involves huge risk, as an investor’s
entire savings is dependent on the accomplishment of just one firm. Experienced
and all-sufficing individuals generally diversify their portfolio by making
investment in various kinds of stocks. However, this methodology is not affordable
for a normal person with average means.
But in case of mutual funds, diversification is probable for any individual. The core
concept of mutual funds is to diversify the portfolio of financial instruments in
order to lower the chance of investing. Since mutual funds allocate their monies

2. into stocks of different companies and in different bonds, the risk is diversified. If
at a time, market price of some definite stocks fall, the loss of the mutual fund
may be offset by the rise in price of some other stocks held by that specific
mutual fund.
Mutual funds are managed by expert fund managers, educated, trained and
specialized in their field. Their job is to carry out the research and analysis work
much more competently than the lay investor and forecast the market trends of
stock and bond prices.
On the other hand, individual stock investment is done directly by the investors
who are in most cases common people who don't have complex awareness about
the different markets. Additionally, as the mutual funds get a lot of money from
people to invest in, they can reap the advantage of economies of scale with the
large sum of invested money.
So for a beginner, the superior way to start investing is to purchase mutual funds.
This financial instrument will really aggregate several stocks and pool their costs
which would diminish the overall risk of losing money and at the same time will
raise chances for the investors to obtain good returns.
Mutual funds may not have the excitement of prompt and massive gains which
stocks are able to provide, but still they are considered an awesome investment
tool in the long run.
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What are typical returns one would expect from different types of mutual
funds
A mutual fund is an investment vehicle which allows an individual to be mostly
diversified in his investments by owning a vast amount of stocks or a particular
investment tool. The funds invested in a particular scheme are managed by a
single fund manager or a team of managers. They make sure that the fund grows
optimally within its investment criteria. These managers are responsible for
buying and selling of securities, which is based on their research results. Mutual
fund companies pool money from some investors. Each of those investors
becomes a shareholder in that fund.
There are literally hundreds of thousands of mutual funds available in the market,
although only few of them are considered worthwhile by the majority of investors
due to its risk return trade off.

3. Like every other financial instrument, in mutual funds too the potential return
rises with an increase in risk. Low risk is combined with potentially low returns,
whereas high risk is combined with high potential returns. According to the
mutual fund risk-return trade off, the money invested can only render higher
profits if it is subject to the chance of eroding. Accordingly, it is really awkward to
quantify returns in exact numbers since that is dependant on market conditions.
The most basal types of mutual funds which are present in the market are as
follows, arranged in the order of increasing risk, and consequently, increasing
returns:
1.Money market funds – This fund carries a really low amount of risk compared
to others. They are considered short term high quality investment tool. This
typical fund makes investments only in U.S. companies and the different levels of
government. Investor losses are quite rare in this category of fund, although they
have happened in the past. This is more or less the type of fund for risk averse
investors.
2.Bond funds, or fixed income funds - This specific fund hold higher risk-
return trade off compared to money market funds. These types of mutual funds
are not limited to a certain type of investment. Here, return can vary due to
different types of risks. Such risks associate: credit risk because certain parties
may not pay the bills on time, interest rate risks due to fall in the value of these
bonds when the interest rate goes up and prepayment risks because the bond
issuer may decide to pay off debt to issue new bonds when there is a fall in the
interest rates.
3.Balanced funds – This specific fund invests in different kind of asset classes
such as vanilla bonds, common and preferred stocks, and short-term bonds etc.
This specific instrument avoids too much risk and gives the investor the
opportunity to gain consistent income and capital appreciation. Investors who
have a aim to earn higher returns but are able to take limited amount of risks are
able to get both income and development from this fund. These investments tend
to control the crisis of the stock market better due to there portfolio balancing
aspects.
4.Global equity growth funds - The value of this category of fund can rise and
fall really quickly over a short duration of time. However, they do tend to achieve
superior over the long-term. This fund is for investors who want to earn higher
returns and are willing to take big risks in order to get it. Over a long duration of
time the risk becomes almost nil which enables the investor to make colossal
profits.
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