Mutual Funds or Stocks: Where To Invest?
When it comes to investing, one of the doubts that may arise is whether it is better to invest in the stock market through shares or mutual funds. But it is necessary to know their advantages and disadvantages. In short, which product is better when it comes to investing for a retail investor.
Profitability, diversification, taxation, cost, liquidity or the time to be devoted to shares or mutual funds are the characteristics to be taken into account.
A priori, a share can be more profitable than a mutual fund because, as it is not diversified, the risk is much higher and, therefore, the profitability you demand from your investment is much higher.
The problem comes when it comes to selecting that stock, since it is very difficult to choose the one that is going to rise more than the market average.
There are many times when stocks do not outperform mutual funds. We have examples of Spanish companies such as Banco Santander or Telefónica where many investors have not obtained profitability for many years and are far behind international funds.
Having a diversified portfolio for a retail investor with little capital is more complicated and costly than through a mutual fund. A portfolio composed of one or a few stocks assumes not only market risk, but also risk specific to that security. In other words, the market or the sector may be doing well, but that particular company may not.
If your portfolio is well diversified, you eliminate the risk of a company doing badly and only assume market risk.
Through an investment fund, even if you invest only 1,000 euros, you diversify immediately through a multitude of shares and products, and at a lower cost than buying the companies directly.
Here it will depend a lot on the investment fund and the broker you choose. Generally, traditional brokers are more expensive than modern brokers that have more competitive commissions. Regarding investment funds, there are funds whose commissions “eat” an important part of the profitability.
Choosing a broker with low commissions and choosing mutual funds with competitive commissions will determine which product is better.
In this matter, mutual funds clearly outperform shares. The legislation allows transfers from one mutual fund to another fund without having to pay tax on capital gains.
This means that if, at any time, the market or a sector is overvalued, you can transfer to other funds that are less exposed to that part of the market.
On the other hand, with stocks, if a stock has reached its target price or you have other more interesting stocks, you will have to sell and buy paying capital gains on the profits, which in the long term affects compound interest.
With dividends the advantage of funds over stocks is similar. Mutual funds have the advantage of being taxed much less and it is easier to avoid double taxation than a retail investor.
If what you like is to receive liquid money, there are distribution investment funds that are fiscally more attractive than investing directly in shares.
Investing in shares requires time as you need to know the company, the sector and the market moment before investing. In addition, once you have invested, the “work” does not end there, as you have to monitor the evolution of the company and know whether you should sell, buy, hold or expand depending on the results.
If you do not have this knowledge of your portfolio or do not have the time to follow your shares, in moments of fall or euphoria you will not know how to act.
With mutual funds, you must also dedicate time to select the best one for your risk profile, with the lowest possible fees, aligned managers and a history of profitability. But this time will always be less than the time it takes to select and manage a portfolio of stocks.
Stocks and mutual funds in general are equally liquid. In stocks, when you give the sell order, you get the money when it is executed and in funds it can take a couple of days for the money to get to you.
The problem of liquidity in a mutual fund can come from the hand of the manager who can temporarily close the outflows of money to face a fall in the market. But this is not a frequent occurrence and selecting the right investment fund can help to avoid ending up in this situation.
If you have doubts, it is important to have the help of a financial advisor to simplify this task. From MullandFraserInvesting we help you to invest without leaving your bank. We fully adapt to your risk profile. Get a quote now!