Mutual funds allow you to buy a whole basket of stocks with one investment. Unless you are an expert at picking stocks, mutual funds are a much safer way to go. With a mutual fund you can invest your money and forget about it. You don’t have to be watching it every day and wondering if you should sell. The fund manager does all of the buying and selling. You can usually add to your fund investment but it can be a very passive way of accumulating savings.
Because a mutual fund can be composed of many different stocks, it isn’t as subject to the whims of the market. While some stocks in the fund may go down, others will go up. While the Net Asset Value (NAV) of a fund may go up and down, mutual funds tend to be less volatile than investing in individual stocks. The NAV is like the share price of the fund.
Investing in the stock market by buying individual stocks involves a lot of research and a fair amount of education. There are lots of experts willing to tell you what stocks to buy but it is “buyer beware.” Just prior to the big tech bust, TV talking heads were touting their own company stocks and leading buyers down the path to ruin. You need a lot of information or sound advice from someone you trust to make your way in the stock market. It is more volatile, meaning you can lose a lot of money quickly or gain a lot quickly.
Exchange Traded Funds (ETFs) are similar to mutual funds in their contents but are more easily bought and sold. They can be purchased and sold just like an individual stock. An ETF might be good for you if you want to have the low risk of a mutual fund with the flexibility of buying and selling like a stock.
Other investments that compete with mutual funds are the more stable investments like bonds and treasury bills. These markets used to be much more risk-free than they are today. They are still a pretty safe investment but they also have a low return on average. In choosing an investment, an individual always has to be clear about the investment goal. A wise investor has a diversity of investments, including conservative and higher risk investments.
Other, even lower risk, lower return investments include Money Market accounts and Certificates of Deposit (CD). Money Market accounts give a fixed percentage and you can move money in and out without penalty. CDs generally give a higher rate of interest and the interest varies with size of deposit and length of time of the CD. The CD pays a higher interest than the Money Market account because a CD must be left in for whatever term you bought it for (six months, one year, three years, five years, etc.). Early withdrawal of your CD money will cost you in penalties and interest.
The mutual fund is a good middle-of-the-road investment. It has the promise of higher returns than fixed interest instruments like Money Market accounts and CDs, but you can still make conservative low-risk investments in reputable funds with good track records. As with all investments, do your homework and ask lots of questions. Investing is a form of gambling no matter what anyone says.