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Mutual Funds vs Stocks: Pros, Cons, and What You Need to Know

February 25, 2025

8 min Read

Written by John Csiszar

Edited by Nupur Gambhir

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If you’re just getting started as an investor, you might wonder whether you should invest in mutual funds or stocks. Both have their good and bad points. Mutual funds are probably less risky, but stocks have the potential for bigger returns. If you’re unsure about the difference between mutual funds and stocks, keep reading to learn more.

What Are Mutual Funds?

A mutual fund pools money from many investors and uses it to buy shares of stock, bonds and other investments. The investors receive shares of the mutual fund relative to the amount they invested. Each share represents a part of the combined “basket” of investments.

There are literally thousands of different mutual funds that you can choose from as an investor, and all of them are run by experts in their field. This means that you can own anything from aggressive growth stocks to international pharmaceutical companies, from Treasury bonds to gold and silver, and professional investors will manage your investment. This can reduce the stress that comes from having to pick all of your own individual investments, not to manage the time savings that comes from handing over your portfolio to experts.

You can also choose to invest in index mutual funds, which are passively managed and meant to replicate the performance of an underlying index, such as the S&P 500.

One of the main benefits of mutual funds is that you receive instant diversification in a single purchase. Even if you purchase a fund whose mandate is solely to buy American growth stocks, at least your money will be spread out over tens or even hundreds of different stocks, rather than owning just one and having your whole portfolio tied to its fate.

What Are Stocks?

Stocks are shares in individual companies. When you buy a stock you are buying a piece of the company, which means you’re a shareholder and have equity in the company. This is why stocks — least, common stocks — are sometimes referred to as equities.

Common stocks offer high growth potential and direct participation in the success of a company. Many common stocks also pay dividends, offering a potential income component.

While most investors are more familiar with common stocks, some companies also issue preferred stocks. Preferred stocks, in many ways, are more like bonds than stocks, although they do trade on an exchange, just like common stocks. Preferred stocks typically pay much higher dividends than common stocks, and their share prices don’t fluctuate in value as much.

Key Differences Between Mutual Funds and Stocks

Mutual funds and stocks can serve similar roles in your portfolio, but their function, structure, and cost are all very different.

Level of Risk

Stocks: High volatility and individual risk
Mutual funds: Diversified risk, generally lower than stocks

Investment Control

Stocks: Full control over purchases and sales
Mutual funds: Managed by professionals, less active decision-making

Costs and Fees

Stocks: Typically, zero commissions to buy or sell, no management fees
Mutual funds: Expense ratios, possible load fees

Time Commitment

Stocks: Requires more active monitoring
Mutual funds: Less time-intensive, as portfolio manager are responsible for making investment decisions

Features	Stocks	Mutual Funds
What It Is	A share of an individual company. As a shareholder, you can make money by selling the stock at a profit, or by getting a dividend.	A share of a fund that consists of a basket of different investments. The investments might be chosen to represent a particular sector or to balance gains and losses.
Who It’s Best For	Investors who want potentially lucrative financial gains in the form of a rising stock price and/or dividends, as well as those who want voting power within the company.	Those who want someone else to make their investment decisions. Most mutual funds are managed by professional fund managers who decide which stocks, bonds and other investments to buy and sell.
Investment Control	As an individual stockholder, you can pick and choose which stocks you want to buy or sell and when. You have complete control over your portfolio, including planning for tax purposes.	Although you can choose the type of fund in which you want to invest, the portfolio managers are in complete control of which specific securities to buy and sell
Costs and Fees	You pay a trading fee when you buy and sell shares. When you sell, you will pay capital gains taxes on appreciation in the price.	You might pay sales charges when you buy or sell shares, and you will pay management fees. Because mutual fund managers buy and sell positions within the fund, you might pay capital gains taxes even if you hold the fund.
Risk and Return	When you buy a single stock, you’re betting on the success of that particular company. You’ll typically make a profit if the company does well and lose money if it doesn’t.	Mutual funds are diversified, so they are inherently less risky than individual equities, but they can still lose money. Their gains and losses tend to be smaller than stocks’.
Learn More	How To Invest In Stocks: A Beginner’s Guide	Mutual Funds: Everything You Need To Know

When To Invest in Mutual Funds

Mutual funds are often a good choice for beginning investors, as they may not have the knowledge required to successfully pick individual stocks. It’s fairly easy to pick a good-performing mutual fund that matches your investment objectives and risk tolerance, however.

Imagine, for example, that you are 25 years old and just starting to invest. You know that you want to grow your money until you retire and you feel like you can handle a moderate level of risk, but you aren’t yet comfortable picking out individual stocks. For your first investment, you should likely consider a mutual fund that focuses on long-term growth, letting the professional money managers make selections on your behalf.

A mutual fund can also be a good choice for a more risk-averse investor who doesn’t want to put their entire portfolio at risk by owning one or more individual stocks. With the purchase of a mutual fund, they will instantly own a portfolio of many different stocks, helping to diversify away the risk.

A good strategy when investing in mutual funds is to dollar-cost average. This strategy requires regular investments, typically every month, which helps smooth out the average cost of the investment. If you invest the same amount every time, you’ll buy fewer shares when prices are high, and more when prices are low.

When To Invest in Stocks

Stocks can be a better option for experienced investors with a high-risk tolerance. This is because it takes research and skill to pick winning stocks, not to mention a strong stomach to handle their volatility.

Stocks are the clear choice for short-term traders who prefer to jump in and out of stocks and make quick profits. Of course, this type of investing, known as day or swing trading, is highly risky and can result in large losses. But if you’re a skilled, experienced investor looking to take advantage of short-term trends in the market, you’re much better off owning stocks instead of mutual funds.

Long-term investors may also prefer investing in stocks because they offer great potential for capital gains. Over the last 20 years, for example, the S&P 500 has returned about 418%, but Apple has posted a gain of over 18,000%.

How To Choose Between Mutual Funds and Stocks

Mutual funds and stocks both have pros and cons, so it’s important to assess which are most important to you before deciding on an investment vehicle. The decision on which one to choose depends on your personal financial situation. If you are very risk-averse, mutual funds might help you sleep better at night because they are better able to weather extreme market ups and downs. If you are willing to trade volatility for a much bigger potential long-term gain, then stocks might be the way to go.

The bottom line is that there is no right or wrong when it comes to choosing stocks or mutual funds. Which one you should invest in depends on a number of factors that are unique to you, including your investment objectives, time horizon, experience, and risk tolerance.

Both individual stocks and mutual funds can be good investment options. However, you’ll have to pick and choose the investments that best match your needs as an investor. For example, if you’re a short-term trader looking to make a quick buck, stocks should be your preference. If you’re a novice to investing but still looking for long-term participation in the stock market, a mutual fund is likely the better way to go. But there’s a vast middle ground between these two extremes in which a combination of both stocks and mutual funds may offer the right balance of diversification, safety, and potential for appreciation.

Vance Cariaga contributed to the reporting for this article.

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