A mutual fund is chosen over an individual stock due to various reasons. Diversification is one of the reasons why an individual would go for mutual funds. Also, the cost of a mutual fund is lower than that of individual stocks and is thus a much more convenient option. However, like any other option, mutual funds too have its demerits. So, it is essential for an individual to understand the process and educate themselves about the available options before proceeding with a particular option. A broken might be of some help when making important investment decisions.
Reasons behind choosing a mutual fund over an individual stock
Diversification – A mutual fund allows a great deal of diversification, which a particular stock wouldn’t. The risk factor associated with a mutual fund is also very less compared to an individual stock. The risk here divides into two categories- Specified risk and unspecified risk. While evaluating mutual fund, a few factors like an investment, performance, loads, etc. need to be kept in mind.
Convenience- Investing mutual funds is one of the most convenient options. It is also a reason why is it strongly recommended to an individual. Some people spend day and night into stocks but end up losing significant portions. No investment option takes the entire responsibility to increase the value of your investment over time. It is a great way to get past complex decisions. It sometimes becomes an issue in case a person choose an individual stock over mutual funds. So, it is always better to go for a convenient option.
Low-Cost-For individual stock, the cost associated is exorbitantly on the higher end. It is recommended to go for a mutual fund. In the case of the latter, the expenses are spread out among investors. They are the ones investing in a particular fund. It is how the cost of every individual reduces to a great extent. Many people opt for a broker’s guidance who charge high, and that is not justified.
Even though a mutual fund is associated with risks but given the advantages it provides over time, it is undoubtedly a better option when compared to investing in an individual stock that is not only costly but also doesn’t allow diversification which is a dire need. When a systematic risk occurs in case of a particular stock, one cannot diversify against it. However, when an unsystematic risk occurs, one can expand against it. It is a very critical decision to make. Before making any decision, one must educate themselves about the potential risks and the outcome. If the expected result generated is worth taking the risk is an important point to consider. Even if an individual has decided on investing in mutual funds, find the fees, performance, loads, etc. that are crucial factors which have a critical impact on the outcome of the investment.