Mutual Funds vs Stocks: Differences and How to Choose

By Rebecca Lake · February 20, 2024 · 9 minute read

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 Mutual Funds vs Stocks: Differences and How to Choose

Mutual funds provide a collection of many investments in a single basket, while stocks allow you to own shares in individual companies.

Either type of asset can help you reach your investing goals — and of course it’s possible to own mutual funds shares as well as stocks. But there are advantages and disadvantages to mutual funds vs. stocks.

What’s the Difference Between Mutual Funds and Stocks?

The biggest difference between a mutual fund and a stock lies in what you own: a mutual fund is a type of pooled investment fund, and a stock refers to shares of ownership in a single company.

Mutual funds can hold multiple investments in a single vehicle (e.g. stocks, bonds, or other assets). Sometimes a mutual fund can hold a mix of stocks, bonds, and short-term debt; these are called blended funds.

Different Types of Mutual Funds

Another difference between mutual funds vs. stocks: Mutual funds can be structured in a variety of ways. Often, a mutual fund manager is responsible for choosing the investments the fund holds, according to the fund’s objectives and investment strategy. But not all funds are actively managed funds; some are passively managed and track a market index (see bleow).

Some types of mutual funds include:

•   Equity funds: These funds can hold the stocks of hundreds of companies. An equity fund typically has a specific focus, e.g. large-cap companies, tech companies, and so on.

•   Bond funds: These provide access to various types of bonds. Similar to equity funds, bond funds can offer exposure to different sectors, e.g. green bonds, short-term bonds, corporate bonds, etc.

•   Target-date funds: Often used in retirement plans, target-date funds use algorithms to adjust their holdings over time to become more conservative.

•   Index funds: Index funds are designed to track or mirror a specific market index, e.g. the S&P 500, the Russell 2000, and so on. These are considered passive vehicles vs. mutual funds that are led by a team of portfolio managers.

•   Exchange-traded funds (ETFs): ETFs are similar to mutual funds in that they hold a variety of different securities, but shares of these funds trade throughout the day on an exchange similar to stocks.

What Are Stocks?

Simply put, a stock represents an ownership share in a single company. There’s no fund manager here; you decide which stocks you want to buy or which ones you want to sell, often using a brokerage account. You might buy 10 shares of one company, 50 shares of a second, and 100 shares of a third — it’s up to you.

Just as there are different types of mutual funds, there are different types of stocks that reflect the underlying company. For example, your portfolio might include:

•   Value stocks: Companies that are trading lower than their potential value, based on fundamentals.

•   Growth stocks: Companies with a track record of steady growth.

•   Dividend stocks: Companies that payout a portion of their earnings to shareholders in the form of dividends. Note that value stocks often pay dividends, but growth stocks tend to reinvest their profits (per their name) toward growth and expansion.

Here’s another way to think of the differences between mutual funds and stocks. If a mutual fund is a carton of eggs, a stock is one egg in that carton.

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*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Pros and Cons of Mutual Funds

Investing in mutual funds can be a good option for beginners who are ready to wade into the market but aren’t savvy about individual stocks just yet. There are, however, some downsides to keep in mind.



Diversification is simplified Some funds may underperform
Easy access to the markets Higher minimum investments
May be cheaper than stocks Not all funds are low-cost

Pros of Mutual Funds:

•   Mutual funds make portfolio diversification easier. Diversifying your portfolio can help manage risk. When you buy a mutual fund, you get immediate diversification since the fund may hold a variety of securities or alternative investments.

•   Someone else makes the decisions. Choosing the right investments for a portfolio can be complicated for many investors, but a mutual fund takes care of the selection process. In the case of an active fund, the fund manager is in charge of buying or selling investments within the fund. A passive fund tracks an index, as mentioned above. Either way, all you have to do is invest your money.

•   Costs may be lower. When you invest in mutual funds, you’ll pay what’s called an expense ratio. This is a fee that represents the cost of owning the fund annually. While some funds are more expensive than others, there are plenty of low-cost options which means you get to keep more of your investment earnings.

Cons of Mutual Funds:

•   Performance isn’t guaranteed. While some actively managed mutual funds attempt to beat the market, others are structured to match the performance of an index. The main thing to know, however, is that results are never guaranteed, and your fund investments may fall short of expectations.

•   Minimum investments may be high. Some mutual funds have a low barrier to entry, and you can get started with a relatively small amount of money, especially if you invest via automatic deposits. Others, however, may require you to have a high minimum investment requirement (e.g. $5,000), which could be challenging if you’re a beginner. With stocks, on the other hand, it’s possible to buy fractional shares with as little as $1.

•   Potentially higher costs. Mutual fund expense ratios can vary widely, and some can be much more expensive than others. In general, active funds charge higher fees. In addition, some brokerages charge load fees to buy or sell funds which can add to your overall costs. It’s important to understand what you’re paying for your investments, as fees can eat into returns over time.

Pros and Cons of Individual Stocks

Investing in stocks might appeal to you if you’d like more control over where your money goes. But just as with mutual funds, there are some potential drawbacks to consider.



High return potential Higher risk
Greater flexibility More difficult to diversify
Low costs More time-consuming

Pros of Individual Stocks:

•   Potentially earn higher returns. Owning individual stocks could lead to better results in your portfolio compared with mutual funds. It’s important to remember, however, that not all stocks offer the same rate of return, and performance of any stock (or any investment) is never guaranteed.

•   You’re in control. Investing in stocks means you have total control of what to buy and sell, and when to make trades. You’re not relying on a fund manager to make decisions for you. That’s something you might appreciate if you prefer a DIY or active approach to investing.

•   Trading costs may be low. When you buy and sell stocks, your brokerage can charge a commission fee each time. However, more brokerages are moving to a $0 commission-fee model for stock trades which can cut your investing costs down dramatically.

Cons of Individual Stocks:

•   Stocks are volatile. Mutual funds are often viewed as being less risky than stocks since you’re diversified across a range of securities. If you’re putting a large chunk of your portfolio into a smaller pool of stocks or just one company, you could be at risk of a major loss if volatility hits that part of the market.

•   Diversification is harder. When you invest in individual stocks, you may have to buy more of them to create a diversified portfolio. With a mutual fund, you don’t have to do that since you’re getting exposure to multiple investments in one fund.

•   Stock trading can be time intensive. Taking a buy-and-hold approach to stocks means you don’t have to pay as much attention to your portfolio. You can buy stocks, and then hang onto them for the long term. However, if you’re more interested in active trading then you’ll need to spend more of your day keeping up with stock trends and monitoring the markets so you don’t miss any opportunities to make gains.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Choosing Between Mutual Funds and Stocks

There’s no rule that says you must choose between mutual funds vs. stocks. Deciding which one to invest in can depend on your time horizon for investing, risk tolerance, and goals. And you might decide that both make sense in your portfolio.

Here’s a simple breakdown of how to compare the two when deciding where to invest.

Consider mutual funds if you…

Consider stocks if you…

Want a simple way to build a portfolio under the guidance of an experienced fund manager who knows the market. Prefer to have more control of which companies you invest in, and when you buy or sell those investments.
Are more comfortable with the idea of generating returns over time vs. chasing the highest rewards of the moment. Want to leverage investments to produce the highest returns possible, even if it means taking a little more risk in your portfolio.
Don’t have the time or inclination to spend hours researching different investments or conducting in-depth market analyses. Are comfortable researching stocks on your own, and understand how to apply different types of technical analysis to evaluate them.

The Takeaway

Investing is one way to build wealth, but both mutual funds and stocks can help investors realize their financial goals — but in different ways. Weighing the pros and cons of mutual funds vs. stocks as well as your personal preferences for investing can help you decide how to build a portfolio that meets your needs.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.


Which is riskier, stocks or mutual funds?

Both stocks and mutual funds expose investors to the risk of loss, though the degree of risk can vary by investment. Mutual funds may help to distribute risk thanks to a diverse mix of underlying investments, while individual stocks can concentrate risk. However, it’s important to remember that you can lose money with either.

Which investment is best for beginners, mutual funds or stocks?

Mutual funds can be a good place for beginning investors to get started since they offer basic diversification. The key to choosing a mutual fund as a beginner is to consider the underlying investments in light of your own asset allocation, the fund’s track record, and the fees you’ll pay.

Are mutual funds worth it?

Mutual funds can be a worthwhile investment because they provide a cost-effective way to access a range of sectors that may align with your goals. For example, if you want to invest in big companies in the U.S., you can buy shares of a large-cap fund. If you want to invest in the environment, you can invest in a green bond fund or green tech equity fund.

Photo credit: iStock/Eva-Katalin

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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