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In investing, two of the biggest investment tools are individual stocks and mutual funds. Picking invidual stocks can be very risky, but can also lead to a handsome reward if you choose wisely. On the other hand, mutual funds diversify your portfolio, exposing you to less risk, but there is also less potential reward to go along with that.

One of the most common question for people just getting started in investing is whether they should invest their money in mutual funds or individual stocks. Both of these investment tools have their place, and if you have the time and resources to devote to investing, you should try to use both to some degree.

But by and large, for the average investor, I believe that mutual funds (or more specifically, index funds) are the better option. Why? It's simple... they allow you to become better diversified in the market and that can curb your risk. With mutual funds you are basically owning a lot of stocks, meaning that if one sector of the economy goes down, there will hopefully be something else going up to offset that. Unless you really know what you are doing in terms of picking stocks (and even then, it's still a risky proposition), trying to pick individual stocks can be too much like gambling and not enough like investing.

Of course, like anything, there are some disadvantages to owning mutual funds instead of individual. Essentially, the downside of having a well-diversified portfolio is that it can put kind of a ceiling on your profits. If you own one stock, there's a chance it can double or triple in a short time, which simply isn't going to happen in a mutual fund. Of course, on the other side of that owning one stock also means that it can crash... for example, talk to anyone that owned stock in Enron.

Looking deeper into funds are index funds, which I believe are a great option. Essentially, these funds simply try to match the market, meaning that the fees are going to be very low. High fees can take a big chunk out of your profits, so the lower the fees, the better. In addition, you can't have any lower fees than owning an index fund.

So I think mutual funds are the better option, especially for the average investor. They take less time to research, less expertise to have good success, and the diversification can help curb the risk that naturally comes with investing in the stock market. There is a reason that mutual funds are so popular- they allow the average investor to be able to get into the stock market without having a large amount of expertise (or money). With limited minimum amounts needed to own mutual funds, they seem like the best choice for most persons.

Learn more about this author, Juan Leer.
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