Mutual funds vs stocks
There are two ways to invest in the stock market — investing in pooled funds like mutual funds or directly buying shares of stock. But which is better? Let’s take a look at how each stacks up:
No. 1: Return
- Average returns for stock funds are around 15% to 20% per year. Of course, actual returns fluctuate widely on a yearly basis. But generally, returns are dragged down by liquidity requirements, higher fees, transaction costs, etc.
- It’s possible to beat the performance of mutual funds by buying stocks on your own using fundamental and technical analysis (rational decisions, not emotional decisions) and by keeping trades to a minimum.
Winner: It depends. If you know what you’re doing, stocks win. Otherwise, stick with mutual funds.
My Notes: When the market is in upswing, the Direct Stocks beats my Mutual Funds....
No. 2: Risk
- Mutual funds have risk, but are tempered by their inherent diversification and built-in safeguards (investment policies, government regulation, separate custodian, etc.).
- Stocks are riskier — you’re on your own (and your emotional mood swings)!
Winner: Mutual funds
My Notes: I definitely agree that is why we call Direct Stocks as Level 3. Higher risk than Mutual Fund but potentially higher returns.
No. 3: Diversification
- You get instant diversification with mutual funds even for as little as Php5,000 or Php10,000.
- That same amount of initial capital buys you just a handful of stocks.
Winner: Mutual funds
My Notes: Certainly true and that is a great advantage if you have limited funds to invest.
No. 4: Control
- You have no control over the investment decisions of the fund manager.
- You have full control over your own investment decisions as a direct stock investor.
Winner: Stocks
My Notes: Two thumbs up. Excitement and Control is what Direct Stocks is all about. But is this what we really want or gain and security out of our investment?
No. 5: Capital
- Most mutual funds require only Php5,000 to P10,000 to invest and just Php1,000 to add more.
- There are online stock brokers that let you invest with just Php5,000 but traditional brokers may require more. And you need more money for additional investments.
Winner: Mutual funds
My Notes: Certainly valid point for Mutual Funds.
No. 6: Convenience
- Mutual funds have distributors — Certified Investment Solicitors (CIS) — you transact with.
- There are online stock brokers where you can easily buy and sell shares on your own.
Winner: Stocks
My Notes: I do not totally agree with the comparison. Having solicitors or brokers is inherent to both whether direct stocks or Mutual Funds. I still find Mutual Fund investing more convenient.
No. 7: Time
- It’s easier to evaluate which mutual funds to invest in — past performance, fees, management, investment objectives and policies — just by reading the prospectus and reports on their websites. There’s minimum time and effort involved.
- For individual stocks, you have to look at a lot of factors — numerous financial ratios, management, company news, industry analysis, technical charts — by reading annual and quarterly reports, research reports, etc. And you have to do for every stock you want to buy.
Winner: Mutual funds
My Notes: Another double thumbs up for Mutual Funds.
No. 8: Taxes and fees
- Mutual funds charge a sales load (around 0% to 5% depending on the amount of investment) with VAT, an annual management fee (1% to 2%), and an incentive fee. If you sell your shares within the holding period (usually within 2 years), there’s a redemption fee (0.5% to 1%). But there’s no tax.
- Stock brokers charge a sales commission (around 0.25% to 1%) with VAT, PSE fee (0.005%), and a 0.01% SCCP* fee. When you sell your shares, you pay the same fees and taxes, plus a 0.5% sales tax.
Winner: Stocks
My Notes: You actually pay more in Stocks if you trade more often as you pay fees to take out or to invest in stocks. In Mutual Fund, the in and out of our stocks is already integrated in the sales load and is done by the Mutual Fund Manager. The management fee is also integrated already in the declared NAVPS.
No. 9: Price
- You buy and sell mutual fund shares at their net asset value per share (NAVPS), which is their book value. In the other words, you buy and sell at what they’re actually worth.
- You buy and sell stocks at their market price, which is not the same as their book value. So you buy and sell at their perceived worth, based on what the market believes should be the right price. In other words, you can buy at a discount and sell at a premium.
Winner: Stocks
My Notes: This goes the other way around too. Since you may buy based on perception and lose money in the process.
No. 10: Timing
- You can time your entry and exit with mutual funds, though prices are updated only once a day. So you can’t really trade mutual funds.
- Prices for stocks are dynamic, changing per hour or even per minute, if they’re actively traded. Of course, there are stocks that hardly move because there are hardly any buyers and sellers. But generally, you can trade stocks and make money faster.
Winner: Stocks
My Notes: I do not agree with this as advantage as I do not promote trading. We go for investing for the long term.
No. 11: Compounding
- There’s a greater impact of compounding with mutual funds, since fund managers reinvest dividends (usually) and proceeds from the sale of stocks to keep the net asset value of the fund growing to make more money and entice more investors.
- Since there are minimum board lots with individual stocks, you may not be able to immediately reinvest dividends (and most likely you’ll end up spending them). And if you’re not disciplined, when you sell your stocks, you may not reinvest them at all.
Winner: Mutual funds
Ny Notes: I agree.
No. 12: Safety
- Mutual funds are regulated by the Securities and Exchange Commission (SEC) and are bound by the Investment Company Act of the Philippines. They have to follow certain rules and regulations that restrict what they can and cannot do. And they are structured in such a way to keep investors safe. Of course, there’s still risk and prices can plummet by 40% or more. But it’s hard to imagine losing 100% of your capital.
- Publicly listed companies are also under the SEC and the Philippine Stock Exchange (PSE), which also sets rules. But individual stocks, especially the not-so-known ones, are more susceptible to speculation and insider trading, making it very possible to wipe off your entire capital if you joined the bandwagon.
Winner: Mutual funds. But if you stick to reputable companies, you can avoid this risk. So which is better — mutual funds or stocks? If you’re a new investor, we suggest you stick with mutual funds until you learn more about investing directly in the stock market. And even if you have more investing experience, it’s a good idea to keep the core of your portfolio in mutual funds with an excellent track record, reputable management, and reasonable fees. Then add individual stocks to boost your overall returns.
My Notes: Bottom-line Mutual Funds have a clear advantage over Direct Stocks Investing. However, it is still the investor who will make that decision and allocation. As for me, we invested in both with Mutual Fund as priority and invested on Stocks that are fundamentally strong companies.
Happy Investing on Both!!!
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