Today’s personal finance tip is about investing in stocks and mutual funds.
If you’ve always been interested in investing, you may have the million-dollar question in mind – which are better, stocks or mutual funds? You will get different answers based on who you ask. Ideally, stocks serve an altogether different purpose and a different set of investors as compared to mutual funds and vice versa.
If you’re reading this, it can be assumed that you have a general idea of what a stock is and you may even have an investment strategy. But as a beginner, you might not know how a mutual fund works. The general idea working behind a mutual fund is that several investors pool their money and a manager later on invests this fund as per the objectives of a particular fund. Few mutual funds track a definite index like the S&P 500 and some others follow an objective like ‘growth’. Let’s take a litmus test to prove which investment option is preferable and appropriate for you.
During the money-saving phase
Where exactly do you stand with regards to your saving? If you’re an individual who’s starting out with diligent saving in your 401(k) or Roth IRA and you’re in your mid 20s or 30s, mutual funds will offer the perfect solution and will give you easy access to start building your retirement savings. With minimum investment of only $1,000, mutual funds offer an easy start to novice investors.
On the other hand, stocks may be for you if you have obtained enough experience (if you’re in the age bracket 40 to 70) because you can manipulate and diversify your portfolio strategy in some ways that you simply cannot do with mutual funds. This also comes with higher minimums, of about $50,000!
With regards to tax sensitivity
Are you someone who’s more concerned about having better control of your tax bill? Usually, stocks offer better tax efficiency as it’s entirely up to you or your investment manager to decide when to take gains and losses. If you hire a portfolio manager, his management fee can also be deducted from your tax return.
But if taxes aren’t a big concern for you, mutual funds are certainly a better option. The management fee is not deductible and there is no such control on the time and amount that you pay in the form of capital gains tax. So your investment option may depend on your tax sensitivity.
Based on whether you’re a control-freak or hands-off
Are you someone who sets a target and then forgets about it? Or do you prefer having more control on your portfolio? If you like to choose an auto-pilot approach, mutual funds are better as they allow you to invest your dollars within a time frame and return years later to check out the results. Although this is not considered as a responsible way of dealing with your life savings, many investors prefer this kind of approach. In short, there’s very little transparency in mutual funds.
On the contrary, if you wish to have true transparency and if that is important for you, you can find it in personally managed stock portfolios. In case you wish to have more control and a deeper understanding of your investment portfolio, stocks are for you. You will know what is going on with your dollars!
So, now that you know some of the pros and cons of both mutual funds and stocks, you just have to go for a self-evaluation to determine which kind of an investor you are. Depending on your type, you can take well-measured and informed investment decisions.
Author Bio: This was a guest post from SB @ ONECENTATATIME.COM. SB is an informed husband and father with dexterity for investing and passion for finance. His blog has over 5,000 subscribers and an impressive repertoire for those interested in making money, savings, investing, and family. Feel free to follow him on his thriving Facebook page too.