When it comes to the highest-yield, least risky types of investments, mutual funds are popular due to their profitability and ease of diversification. But are there other types of investments that may be more worth your time and money than the ubiquitous mutual fund?
Investments that are better than mutual funds include:
- ETFs, or Exchange-Traded Funds
- Stocks
- High-yield savings accounts
- Cryptocurrency and gold
Investing in these instruments may offer you low to no fees, lower overall trading costs, more stability and control, and a more diversified portfolio.
Further in this article, we’ll cover all four of these above stated investment types that may be better than mutual funds depending on your individual preferences, account size, risk appetite, and based on how you want your money to be managed. Keep reading to learn more about why you should consider expanding and diversifying your investments with these four mutual funds alternatives.
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Table of Contents
4 Investment Types That Are Better Than Mutual Funds
Described below are the four investment alternatives that, depending on your investment purposes, might be better than mutual funds:
ETFs, or Exchange-Traded Funds
Exchange-traded funds (ETFs) are a popular investment often compared to mutual funds due to their lower costs, tax efficiency, and higher overall stability, even though their returns tend to be slightly smaller and slower to grow.
While most mutual funds publicly report the value of their holdings every quarter or as little as biannually, exchange-traded funds report their holdings each day. This means that investors are more informed and up-to-date on the value of their holdings.
Similar to mutual funds, ETFs allow you as an investor to purchase a diversified portfolio of securities.
Notably, however, exchange-traded funds’ fees and share prices are typically much lower than mutual funds, making them easier for beginners to invest in since your initial investment is typically lower than it would be for a mutual fund.
The main reason why ETFs are cheaper is that they don’t involve active management as mutual funds do. Active management means the fund is overseen by a manager who actively monitors, buys, and sells individual stocks daily to generate higher profits.
However, mutual funds also often charge annual fees or commissions, which build up over time and significantly lower your returns. Also, most mutual funds have a minimum investment, while ETFs don’t.
When it comes to tax efficiency, ETFs are also preferable to mutual funds. ETFs have lower capital gains taxes because of how they are structured and managed compared to mutual funds. In addition, they are bought and sold less often because they don’t have active management.
ETFs can be traded throughout the day, similar to stocks. On the other hand, mutual funds are traded only once per day after the market has closed. ETFs are a great middle-ground between stocks and mutual funds when it comes to stability.
Overall, an ETF is better than a mutual fund if you want:
- Cheaper fees, per unit prices, and overall initial investment (but somewhat slower returns).
- More transparency and ease of trading on a day-to-day basis.
- No intervention from an active manager, meaning you’ll be more hands-on with your investment and may need help from a financial advisor.
Individual Stocks
Another great alternative to mutual funds is investing in individual stocks. You can trade them throughout the day, and you have more control and choice over how you diversify your portfolio compared to a mutual fund.
However, they also tend to have higher capital gains taxes.
A common complaint about mutual funds is that they tend to be relatively hands-off and offer little control to investors over the collection of securities they’re investing in. Since it is overseen by an active manager, you won’t have much say in your portfolio’s management or how its holdings are traded.
With individual stocks, though, you have much more influence over your investments because you gain partial ownership of the company’s assets. You’ll be able to participate in board meetings, and you’ll even have voting rights when it comes to your individual shares.
On the other hand, selecting your own individual stocks to invest in might be intimidating to novice investors, as the risks can be higher.
Diversification is crucial when trading individual stocks. In other words, you don’t want to put all of your eggs in one basket. Additionally, without an active manager’s help, you might occasionally want to seek advice from a financial expert on how to manage your shares.
Similar to exchange-traded funds, they’re also more transparent than mutual funds. You will be able to see precisely what your holdings are each day. Stocks can be traded throughout the day, while, as we briefly mentioned earlier, mutual funds may only disclose their holdings two to four times per year.
Even if you don’t switch all of your holdings from a mutual fund over to individual stocks, it’s still a good idea to invest in some low-risk stocks, particularly in reliable tech giants and food and beverage providers. Some of the best options include:
- Amazon
- Apple
- Walmart
- Coca-Cola
- Netflix
- Disney
As with many types of investments, diversification is key.
High-Yield Savings Accounts
Now for something a bit different: the high-yield savings account.
These accounts are excellent for saving money over a long period for a large purchase like a home or a car. They’re also great for building up an emergency fund thanks to their somewhat slow yet moderate yields over time that require little oversight.
The best part about high-yield savings accounts is they involve virtually no risk at all because you deposit money into the account over time and watch it accumulate value. However, the low risk also means its returns are low and gradual rather than high and somewhat volatile.
With most investments, you’ll have to decide whether you value stability and gradual gains or the potential for significant, sudden gains (or losses) more. Some, like individual stocks, offer a decent middle ground, but they also require a lot of management to become successful.
A high-yield savings account is a great option, particularly when combined with other types of investments. They also offer a great safety net if one of your other investments, such as a mutual fund, experiences a sudden drop in value.
“Alternative” Investments: Cryptocurrency, Gold, Art, and More
Many beginner and expert investors alike tend to balk at the sheer unreliability and novelty of investing in more volatile things like cryptocurrency, gold, and even collectibles like coins and art.
However, they’re worth looking into, particularly if you combine small investments with some of the other more stable and “official” investment types on this list to diversify your portfolio even further.
Perhaps you’ve discovered a Bitcoin competitor that’s exploding, and you want to get in on the initial success it’s experiencing. Maybe gold has recently gone down, and you’re in the perfect position to invest in it and resell it at a profit later. Perhaps art is your passion, and you enjoy buying and selling interesting pieces.
Even things like rare paintings, coin collections, stamps, and other memorabilia with high values in collectors’ circles can be hugely profitable if you’re willing to do a bit of research and put in the effort of managing them yourself.
You have a lot of room to get creative with these types of investments. They aren’t particularly stable and require some homework to understand fully, but there is a vast range of options for investors of any background or skill level.
These alternative investments provide a more enjoyable, engaging alternative to a hands-off mutual fund where you have little to no say in how it is managed.
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Conclusion
The mutual fund is a popular and well-known investment thanks to how easy it is to understand and how little oversight is involved. Still, there are many better alternatives when it comes to costs, control over your investment, transparency, and overall profits.
Now that you have some alternative investment types to look into, you can choose which ones are best for you and your management style. ETFs, stocks, high-yield savings accounts, cryptocurrency, and even collectibles like art, coins, and gold offer some excellent ways to diversify your investments and have multiple revenue streams moving forward.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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