Introduction
Mutual Funds comprise diversified investment portfolios wherein the assets include stocks, bonds, fixed-income securities, and other regularly traded derivatives. Retail investors do earn lucrative rates of return when they invest their money in Mutual Funds.
However, a mutual fund relates to a type of investment option wherein a limited degree of customization is offered to consumers who look for tailormade financial goals to take care of. Here, when you want to look for an investment that perfectly aligns with your financial goals and caters to your risk tolerance, then you might find that mutual funds are not solving your purpose here.
You might as well want to seek alternative sources of investments that can be customized to align with your short-term, medium-term, and long-term financial obligations you have in mind. On this parlance, let us unveil the blog topic- ‘What Investments Are Better Than Mutual Funds’ on a more comprehensive note. Helping you get started further on the same:
Exchange Traded Funds or ETFs
ETFs are better investment alternatives as compared to mutual funds on account of the following reasons. These include:
A- Lower Fees
ETFs have lower expense ratios as compared to mutual funds. Therefore, retail investors can get started with a minimum deposit and, after paying a minuscule fee to trading brokers, as compared to mutual funds. Therefore, ETFs are more conducive for cost-conscious investors indeed.
B- Better Level Of Liquidity
ETFs have a higher level of liquidity as compared to mutual funds. This is mainly because these trading derivatives can be bought or sold similar to equities. Here, the investors get the flexibility of intra-day trading similar to that of stock exchange markets. While, on the other hand, the assets inside mutual funds are monitored on a less-frequent basis, taking the NAV (Net Asset Value) of independent assets inside baskets.
C- Tax Efficiency
Most of the gains or income you receive from ETFs can be converted into capital gains so that lower slabs of tax are applied on the RoI of the portfolios. Therefore, etfs are more tax-efficient as compared to mutual funds. However, some of the leveraged ETFs can be highly speculative, and investors must keep track of the same.
Index Funds
Index Funds are better investment alternatives to Mutual Funds on account of the following reasons. Helping you through with a rundown of the same:
A- Ultra Low Fees
Index Funds come to you with ultra-low fee structures, especially when you have broader bandwidth for tracking indexes, say, like your S&P 500. Therefore, index funds are highly suited for long-term investors who aim for market-average returns from their portfolios.
B- Provides you with a consistent level of long-term performance
Index Funds provide you with a consistent degree of long-term performance. These stocks provide long-term growth over actively traded mutual funds. You can also look for retirement investments when you can club indexed funds with 401 (k) or IRAs.
C- Passive strategy helps you through avoidance of market risks
S&P 500 Funds comprise stocks, bonds, and shares from the top 500 performing companies across both the manufacturing as well as service sectors. Therefore, you have a passive monitoring strategy that is adopted by product-issuing firms. Henceforth, investors are impacted by fewer market risks. In other words, you have fewer risk factors that arise from poor management decisions. Therefore, index funds build stable investment portfolios on a long-term basis.
Direct Stock Investments
Let us move on to discover how direct stock investments can be better investment options over mutual funds. Helping you through a rundown on the same:
A- Potential for higher returns
When you buy direct stock investments, you have the potential to earn higher returns on your investment portfolio, especially when you pick winning stocks early.
Apple and Amazon are examples of dividend stock investments that can offer you lucrative rates of return over a relatively shorter span of time. At the same time, direct stock investments are also subject to a higher degree of volatility, and investors must remain wary of the same.
B- Complete control over the governance of your investment portfolios
You have complete control over the governance of your investment portfolios. Once you have your trading account set up, it is you who decides what stocks or shares you can buy and what stocks or shares you can sell in the marketplace.
Therefore, direct stock investments are highly recommended for those investors who have a thorough knowledge of how equity markets work or operate.
At the same time, you must also be willing to take higher risks over the potential higher returns on your portfolios. Therefore, if you do not concentrate well while picking your stocks and end up with poor decisions, you can lose of sizeable portion of your capital wallet, which is then treated as the risk tolerance you take in under your financial belt.
C- No ongoing management fees
When you invest in direct stock investments, you do not have the obligation to sign up with somebody. You can open your account and comply with your KYC credentials, and then start. Henceforth, there are no fees that are levied for buying and selling direct stock investments. This way, you gain access to your own profits without relying upon brokers or middlemen.
D- These are time-intensive investment portfolios
Direct stock investments are highly time-intensive. You must constantly be on the lookout for market scenarios to buy stocks when the prices fall and sell when the prices increase. Rising markets are known as bull markets, while falling markets are also known as bearish markets. Therefore, you must understand market movements well to deal with the nuances of trading with direct stock investments.
Real Estate Investment Trusts or REITs
You can look at Real Estate Investment Trusts, or REITs, if you are looking for more customized investment options as compared to mutual funds. Let us have a rundown of some of the more lucrative benefits when you choose REITs as your investments.
A- High Dividend Yields
You can own real estate shares, bonds, or mortgage deeds, wherein you can earn attractive returns on investment. You get higher coupons or dividend earnings when the property prices appreciate. Therefore, your investment via real estate assets can be a good income-generating option for you as income-focused investors.
B- Real Estate Exposure
You can own handsome investment portfolios by choosing real estate as your investment domain. The best part is that you can digitally own these portfolios without owning a physical asset or property under the builder’s name. Investors typically retain these portfolios as income-hedged assets that appreciate very fast, catering to their near-future financial plans.
C- Diversified Investment Portfolios
You get access to diversified investment portfolios when you invest in real estate assets. You can have a mix of real estate shares, bonds, and mortgage deeds that provide you with a diversified income portfolio of receiving fixed as well as variable coupons.
These assets do not rely too much on the market volatility of stock exchanges and therefore can be more stable income portfolios for you as such. However, as an investor, you must be wary of changing interest rates and market movements in the real estate sector.
Cryptocurrencies and Digital Assets
These are the primary features and benefits that are associated with you owning cryptocurrencies and other digital assets. Let us have a quick rundown on the same:
A- Exponential growth potential on the cards
Crypto coins have shown tremendous growth in the latest decade. And, when investors opt to mine Bitcoins, their coins have reached 100 times more growth over traditional investment options. Therefore, investment via crypto coins or bit-coin-mining is definitely a faster and a more savvy investment alternative over dabbling with fiat currencies or traditional investments.
B- Getting access to diversified income-earning portfolios
You can own digital assets like never before. You can opt for dual currencies like Euro-Dollar, Dollar-Pound, or other interesting permutations or combinations to make your investment portfolios more attractive than ever before. You can also include crypto and Bitcoins to dabble as investment options or to mine these coins right there from scratch.
These are investment options that are best suited for high risk tolerant and savvy investors. This is because blockchain tech can be quite disruptive, and you must learn the nuances of trading with digital currencies before you invest your real money into the campaign.
C- Decentralization and Innovation
You can choose to own digital assets like cryptocurrencies or deal with high-moving international currencies only if you are highly knowledgeable to understand how the currency markets work on an international parlance.
You must, therefore, keep your lines of communication open to learn new or innovative stuff. Above all, you must adapt your investment moves to the higher volatility markets that can take your capital vault by shock. You can incur potential losses if you dabble with digital assets without having proper know-how on how to go about the whole thing.
Robo Advisors
Robo Advisors can be a more automated way of owning your investment portfolio. Let us discover how this can be done:
A- Automated Diversification
You have these portfolios fully automated using Artificial Intelligence or AI plus Virtual Robots that manage your investments. These chatbots can view market movements and curate simulation charts in a very precise and accurate manner.
You get instant updates on what stocks to buy or which ones to immediately sell. This way, you need not have a constant watch over market movements, and this can be a hand-off approach for those of you who would love trading as a side hustle and continue with your 9-5 jobs, too.
B- Tailored for beginner investors
Robo Advisors highly suit those of you who are novice or amateur investors and have started your journey in the field of investing afresh. You can follow the approach of ‘Set it first and then forget about it’. The chatbots do most part of the powerlifting like:
- Viewing rising/ falling prices of stocks and commodities through market hours
- Setting stop losses to sell your investments before you incur losses
- Analyzing simulated charts and dashboards to make well-informed trading decisions.
C- Highly cost-effective
You can opt for a fully automated investment portfolio that is aided by robo-advisors. You just pay for the software, and you can get it set up. Once you are done, you can manage or operate your trading transactions on your own.
You can buy as many direct investment stocks as you want and sell as many as you want. You do not have to pay brokerage or middleman’s fees for the profits you incur on trading transactions. Therefore, this is a highly cost-effective method of dealing with your investment portfolios on the whole.
Private Equity/ Venture Capital
Private Equity/ Venture Capital is a better option over Mutual funds for the following set of reasons. Let us have a brief rundown on the same:
A- High earning potential over traditional investments
Successful startups provide investors with higher rates of return over traditional investments like bonds or fixed-income securities. This is an investment option that is meant for highly accredited investors who own a high net worth and can take in a higher quotient of risk tolerance under their belt.
B- Access to exclusive deals
Here, you get access to their inner circle deals in terms of receiving first-hand discounts or royal club offers that you can avail with friends or family.
Say, for example, you clinch a franchisee deal with Max Fashions, you and your family members can avail of discounted deals from factory outlets.
As investors, you can look for long-term growth of your investment portfolios as you get access to illiquid investments that come with an asymmetric upside potential.
C- Complex diligence is required
Here, you must be a seasoned investor to tackle long-term capital losses if the industry is picking up at its desired trajectory. These investments require concentration and a due diligence approach while you handle them. At the same time, you cannot buy or sell investments at short tenor’s notice. These investments are meant to be held long-term.
Fixed Income Instruments like Bonds and Debentures
You can opt for mixed investment baskets comprising bonds, fixed-income securities, and debentures. These are better investment alternatives to mutual funds for the following set of reasons. Let us have a thorough overview of each of the above:
A- Stable source of income
You get stable income earnings in the form of interest or coupon payouts. Therefore, these are portfolios that guarantee you passive income-earning opportunities. High conservative or risk-averse investors usually opt for fixed-income securities, bonds, and debentures inside their wealth/ investment baskets.
B- Highly capital-protected assets
Pensioners, retirees, and senior citizens usually opt for capital-protected assets as they do not want to lose their lifelong savings that are deposited into investment portfolios. Therefore, bonds, debentures, or fixed income securities guarantee the return of capital or principal at the end of the term period these investments are backed with.
C- Lower level of volatility as compared to mutual funds or equities
Although you get modest rates of return from fixed income trading instruments, these portfolios are less risky or volatile as compared to equity-based assets like stocks, shares, commodities, or futures. You can plan for retirement or other future initiatives using these capital-safe instruments.
However, investors must remain wary about interest rate changes or credit risks that can pose a potential threat to capital reimbursement by product issuing firms if they file for insolvency or bankruptcy. Credit risks can eat away most part of your capital investments.
The Bottom Line
Most of the features, benefits, and overall risk factors for alternative investment options have been covered in a nutshell. Now, although these investments can be better than mutual investments, you still have to go through the terms and conditions of the offer documents and analyze your options before you sign on the dotted lines. What are your thoughts on this? Do mention it in the comments below!
Frequently Asked Questions or FAQs
What is the difference between mutual funds and alternative investment options?
Answer: You have a fund manager inside mutual fund companies that design risk-tolerant portfolios for retail investors, and most of the investment decisions are primarily taken by the higher management of fund companies, and investors have a little say on the decisions that are taken in lieu of their investment portfolios.
Whereas, when you choose alternative investments such as equities inside the stock market or time horizon investments, you can customize investment objectives according to your time line. You can underlie a pool of assets under your name and choose maturity periods to suit your financial objectives. This way, alternative investments differ from mutual funds.
