Whether you’re a first-time stock investor or veteran, it is important to understand what differentiates single stock investments from mutual fund investing.
Managing and Monitoring
Mutual Funds are managed professionally by fund managers. They oversee the day-to-day decisions that a changing stock investment involves. The fund manager has access to information that would cost an exorbitant amount to normal investor, even if they had the time and inclination to do the work themselves.
Diversification & Volatility
Many experts agree that almost all of the advantages of stock portfolio diversification are fully realized when a portfolio holds around 20 stocks operating in different industries. At this point almost all of the diversifiable risk associated with investing has been diversified away. The remaining risk is systematic risk, or market-wide risk, which cannot be diversified away. Since most brokerage firms having a minimum share purchase requirement, it’s hard for many investors to afford 20 different stocks. With the Mutual Funds diversification is very large and at a time 20-50 stocks are covered. Thus MFs are less volatile in nature.
Return Potential
There are a lot of success stories where someone got quick rich by investing in equities directly and it can happen, but those are rare happenings and require lot of work and analysis, patience and belief in what you have picked. It is an extremely risky affair. Whereas mutual funds are known to deliver decent returns in long term.
Convenience
The convenience of mutual funds is undeniable and is surely one of the main reasons why investors choose them in their portfolio. SIP (periodic investment) in mutual fund works very conveniently and is recommended as a great way of disciplined investing in equity markets for long-term basis. However SIP in stocks does not work. Although, some companies provide the facility of SIP in stocks but it’s a terrible concept. SIP in a particular stock does not make sense because there is no diversification with single stock.
It’s important to remember there are both advantages & disadvantages with any kind of investment. So as with any decision, educating yourself and learning about the bulk of available options is the best way to proceed. The value of both mutual funds and stocks will fluctuate with changes in market conditions.