Regardless of how much money you have in the bank, diversifying your portfolio is always a wise idea in order to avoid putting all your eggs in one basket. The variety of products and choices available can seem overwhelming to the novice investor, but learning the differences between them can aid you in making educated financial decisions.
If you are interested in taking your savings to a new level, knowing how managed funds differ from individual stocks is a crucial piece of information.
Managed funds are also known as a collective investment scheme, mutual fund or investment fund. According to the U.S. Securities and Exchange Commission, managed funds are comprised of “stocks, bonds, short-term money market instruments, and/or other securities.” The items are bundled together so investors can pool their money and get a slice of the return. Varieties of managed funds can also include mutual funds in the foreign exchange marketplace and managed index funds (designed to mimic the average market returns).
Managed funds are a popular and easy way to diversify your portfolio. The advantages of managed funds include:
- Reduced capital risk
- Convenience
- Professional management
- Minimum investment as low as $1,000
- Fairly liquid assets
- Low transaction fees
Individual stocks, on the other hand, are a way to buy a piece of a corporation and this type of investment allows you to share in ownership. They are a type of security that the SEC explains “have historically had the greatest risk and highest returns.” The nature of the investment is volatile, but with greater risks can come greater rewards. The advantages of individual stocks include:
- Over time, stocks typically outperform all other investments
- Stocks can beat inflation due to their long-term rate of return
- When you own an individual stock, you become a part owner of the company in which you invested
- Stock certificates can be held as collateral by your bank
Despite the differences, managed funds and individual stocks do have one major attribute in common. Neither of them is protected by the FDIC. Always keep this risk in mind.
