Healthcare mutual funds vs. individual stocks: Which is more suitable for you?

There are two main routes to invest in the healthcare sector: mutual funds and stocks. Both options have their unique benefits and risks, and the option that is suitable for you depends on your investment goals, risk tolerance, and understanding of the market.

Let’s take a closer look at the basics of healthcare-based mutual funds vs individual stocks of the healthcare industry to help you decide which might be suitable for you.

• Table of contents

1. Comparing healthcare mutual funds and stocks
2. Key features of healthcare funds
3. What are healthcare stocks?
4. Key features of healthcare stocks
5. Healthcare funds vs. individual stocks: Which to choose?

Comparing Healthcare Mutual Funds and Stocks

A mutual fund is a type of investment where money from many investors is pooled together to buy a diversified portfolio of stocks, bonds, or other securities. There are several types of mutual funds, based on the asset class in which they invest. Equity mutual funds invest primarily in company stocks, debt mutual funds invest in bonds and other fixed-income securities, and hybrid mutual funds invest in a combination of both.

Thematic funds are a sub-category within equity mutual funds. Unlike other equity funds that invest across industries, thematic funds focus on sectors that are linked by a common theme, such as health, infrastructure, or technology. Healthcare funds or health and wellness funds are examples of thematic funds.

When you invest in a healthcare-based mutual fund, your money is combined with that of other investors to buy shares in various healthcare companies. These companies can include pharmaceutical firms, biotech companies, medical device manufacturers, hospitals, and more.

Key Features of Healthcare Funds

• Multiple sub-sectors: Healthcare funds can invest in a variety of companies and sectors related to health and wellness. This means your risk is spread out, as the fund is not dependent on the performance of just one or a few companies.
• Professional management: Professional fund managers who have expertise in selecting and managing investments design the portfolio and identify stocks with growth potential. They also monitor the portfolio and make changes to it when necessary to potentially fulfill the fund’s objective of achieving long-term growth.
• Accessibility: Healthcare funds are easy to invest in and you can access a diversified portfolio even with a small sum.
• Long-term growth potential: These funds are generally aimed at long-term investors looking to benefit from the growth potential of the healthcare segment.

What are Healthcare Stocks?

While the term healthcare stocks might sound similar to healthcare-based mutual funds, there are some key differences. When you buy a healthcare stock, you are purchasing shares in a specific healthcare company. This means you own a small part of that company and may benefit from its growth in value over time.

Key Features of Healthcare Stocks

• Ownership: Owning a stock means you have a stake in the company.
• Potential for higher returns: If the company performs well, the value of your stock can increase significantly, offering high returns on your investment.
• Higher risk: Individual stocks can be volatile, meaning their value can go up or down quickly. This makes them riskier compared to mutual funds, which are diversified, hence spreading risk.
• Active management required: Investing in individual stocks requires more time and knowledge, as you need to actively monitor the company’s performance and market trends.
• Less diversification: To hold a diversified portfolio of healthcare stocks, you will need to identify and handpick individual stocks representing many companies and sectors within healthcare. Curating such a portfolio can be challenging, time-consuming and requires considerable knowledge and skill.

Healthcare Funds vs. Individual Stocks: Which to Choose?

Now that we’ve covered the basics, let’s compare healthcare-based Fto see which might be a better option for you.

1. Diversification

Healthcare funds offer diversification through a single investment. Your money is spread across multiple companies and sectors within healthcare, which mitigates the impact of poor performance of one sector on your overall investment.

On the other hand, investing in individual healthcare stocks is riskier because you’re putting your money into one company. If that company doesn’t perform well, you could lose a significant portion of your investment. If you seek diversification, you need to identify multiple stocks and invest in each individually. However, if you’re willing to take on more risk, individual stocks can also offer higher returns.

2. Potential Returns

The professional management of these funds means that investment experts are constantly monitoring the market and adjusting the portfolio to optimise return potential. This can make healthcare-based mutual funds less risky than independently managing a portfolio of stocks. However, because the risk is spread out in mutual funds, the returns may not be as high as those from individual stocks, especially if those stocks outperform the market or their peers in the sector.

3. Ease of Investment

Healthcare funds are more beginner-friendly than stocks. You don’t need to spend a lot of time researching individual companies or tracking stock performance (though it’s always beneficial to be well-informed so that you can choose a suitable scheme and investment strategy). With mutual funds, you can rely on the expertise of the fund manager to make decisions on stock selection and portfolio management.

Investing in individual stocks requires more time, research, and active management. You need to understand the company’s business model and financial health. You also need to keep constant tabs on market conditions and developments within the relevant sectors. This makes stock investing more suitable for experienced investors who are comfortable with taking on higher risks and independently managing their portfolios.

4. Costs

Healthcare-based mutual funds often come with management fees and other costs, such as expense ratios. These fees can eat into your returns over time.

Investing in individual healthcare stocks, on the other hand, typically involves lower costs. You may only need to pay a brokerage fee when you buy or sell stocks. Because there are no ongoing management fees, if your stock performs well, you get to keep more of your returns. That said, it’s important to remember that stocks require more time and knowledge to manage, which can be considered a cost in terms of effort.

5. Control Over Investments

When you invest in healthcare-based mutual funds, the fund manager makes the decisions on which stocks to buy or sell, and you have little say in the matter. Investing in individual healthcare stocks, on the other hand, gives you complete control over your investment decisions. You can choose which companies to invest in, when to buy or sell, and how much to invest. This control may be preferable for those who are confident in their investment knowledge and want to tailor their portfolio to their specific goals.

6. Time Commitment

Healthcare funds require less time and effort from the investor. Because the fund is professionally managed, you don’t need to constantly monitor the market or make decisions about buying or selling. Investing in individual stocks requires a greater time commitment. You need to stay informed about the company’s performance, industry trends, and market conditions. If you’re willing to dedicate the time and effort, individual stocks can offer higher rewards than mutual funds, but they demand active involvement and require expertise.

Conclusion

In the comparison of healthcare-based mutual funds vs. stocks, there is no one-size-fits-all answer. The best option for you depends on your investment goals, risk tolerance, and the amount of time and effort you’re willing to commit.

If you’re looking for a more diversified, professionally managed investment that entails lower risk and requires less time commitment than individual stocks, healthcare-based mutual funds might be the better choice. They offer steady, long-term growth potential and are easier to manage, especially for beginners.

However, if you’re willing to take on more risk, have the time to research and monitor your investments, and are aiming for potentially higher returns, investing in individual healthcare stocks can be suitable, but the quality of stock selection can make a significant difference to your return potential.

FAQs

What are the main advantages of investing in healthcare funds?

Healthcare-based mutual funds offer diversification, professional management, and ease of investment. They are a good option for those seeking steady, long-term growth with relatively lesser risk and lower time commitment than investing in individual stocks.

How do the risks of healthcare-based mutual funds compare to those of individual stocks?

Healthcare mutual funds are generally less risky than stocks because they spread your investment across multiple companies and sectors within a theme. Individual stocks are riskier due to their potential for higher volatility, but they also offer the chance for higher returns.

Which option offers better returns: healthcare funds or individual stocks?

Individual stocks have the potential for higher returns if you choose a stock that performs exceptionally well. However, they also come with higher risks. Healthcare-based mutual funds, in comparison, can offer less return potential but also entail slightly lower risk.

Can I invest in both healthcare mutual funds and individual stocks?

Yes, investors can choose to invest in both healthcare-based mutual funds and individual stocks to balance their portfolios. This approach allows them to benefit from the diversification and professional management of mutual funds while also taking advantage of the higher return potential of individual stocks.

However, having two investments in the same industry/theme can result in a more concentrated portfolio. A more diversified investment spreads risk across investment avenues, asset classes, and sectors.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.