If you have some spare money after paying the bills and do not want to buy any gizmos or want to start a financially responsible life, you might be debating whether it is better to invest in stocks or buy mutual funds to get the best returns. This question should also be considered while setting up a retirement fund. To make the right choice, you should know what stocks and mutual funds are.
Stocks: Many people think they have a fair understanding of the meaning of stocks, just because they hear it daily in normal course. Stocks are units of companies that can be bought by public in open trading on the stock exchange. Stocks are generally sold in packs, so when you opt to buy the stock of a certain company, you have to make a minimum purchase. Stockholders are directly affected by the price of their stocks as it is directly connected to the company’s performance and hence have a vested interest in the profitability of the company. Stocks are segregated into the type of business they operate, called as sector.
Mutual Funds: Mutual funds are groups of investments that gather money from many investors and use the money to purchase stocks, bonds, and other investments. Mutual funds are generally handled by a certified professional, as against stocks that are managed by the private individual. Basically, mutual funds include various types of stocks.
The choice between investing in stocks or mutual funds basically boils down to the personal expertise and amount to be invested of each individual. Many people are attracted by the luck factor involved in purchasing stock, and the opportunity to invest individually in the reputed company. But the fact is that by the time the stocks are offered to the public, they are already over priced. Also investing in single stocks is a very risky process since your returns depend on the profitability of a single company. Even wealthy investors have broad-based portfolios as they invest their money across various types of stock. But this process can be expensive for the common man.
For the first-time investor, buying mutual funds is the best bet. Mutual funds combine the costs of various stocks, reduce the risk of financial losses and increase the prospects of profits. Mutual funds do not give you the thrill of investing in a high-flying stock, but provide good long-term financial gains. Also since the mutual funds are managed by experts well versed with the drawbacks and advantages of the investment world, they can reduce both risk and the time required to select individual stocks by research and appointments. Mutual funds also divide the risks among various investors, and are managed by people who have strong network inside the financial world.
For the person having spare money but no time or the expertise to “play” the stock market, mutual funds are their best bets.