Stocks vs. Bonds vs. Mutual Funds: What Are the Differences?

Stocks, bonds and mutual funds are all common ways to invest, with the first two considered asset classes and the third an investment vehicle. Each of these options operates differently in terms of structure, returns and risk exposure. Stocks represent ownership in a company and can offer growth through capital appreciation, but with greater volatility. Bonds are debt instruments that are more focused on income and capital preservation, typically offering lower risk and lower returns. Mutual funds combine capital from many investors to buy a mix of assets that may include stocks and bonds, as well as other assets.

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Stocks vs. Bonds vs. Mutual Funds: What Are They?

Stocks, bonds and mutual funds are three of the most common investments. Each represents a different method of putting money to work in financial markets.

Stocks

Stocks represent fractional ownership in a publicly traded company. When you buy a share, you become a partial owner, entitled to a portion of the company’s profits, typically through capital gains or dividends. Stock values are influenced by company performance, investor sentiment and broader market trends. They are traded on exchanges and can fluctuate daily, offering liquidity but also exposure to market volatility.

Bonds

Bonds are fixed-income securities issued by corporations, municipalities, or governments to raise capital. When you purchase a bond, you are lending money to the issuer in exchange for periodic interest payments and the return of the principal at maturity. Bond prices are affected by interest rates, credit ratings and time to maturity. While less volatile than stocks, bonds are not risk-free—especially when it comes to inflation or issuer default.

Mutual Funds

Mutual funds pool money from multiple investors to buy a portfolio of assets, which may include stocks, bonds or other securities. Each fund is managed according to a specific investment objective, such as growth, income or balance. Investors gain exposure to a broader set of assets without having to manage individual securities themselves. Mutual funds charge management fees and may have varying levels of risk, depending on their holdings and strategy.

Stocks vs. Bonds vs. Mutual Funds: Average Returns

An investor comparing returns for different investments.

From 1926 through 2024, U.S. large-cap stocks delivered an average annual return of 10.4%, according to data from the Ibbotson® SBBI® U.S. Large-Cap Stock Index. In contrast, long-term U.S. government bonds averaged 5% annually, while 30-day Treasury bills returned approximately 3.3% over the same period.

Mutual fund performance varies based on asset allocation and management style. Index funds that track broad market benchmarks often mirror the returns of their underlying indices, minus fees. Actively managed funds, aiming to outperform the market, frequently underperform passive counterparts after accounting for expenses, as highlighted by Morningstar’s SPIVA reports.

While stocks have historically offered higher growth potential, they also come with greater volatility. Bonds tend to provide more stable returns, appealing to risk-averse investors. Mutual funds offer diversification and professional management, with returns influenced by their specific holdings and strategies.

How to Invest in Stocks, Bonds and Mutual Funds

Investors can access stocks through brokerage accounts, where they can buy individual shares on exchanges like the NYSE or Nasdaq. Online platforms such as Fidelity, Schwab, and Robinhood offer direct trading with varying levels of research tools and fees. Investors seeking broader exposure may also choose mutual funds or exchange-traded funds (ETFs) that track stock indices.

Bonds can be purchased through brokers, bond marketplaces, or directly from the U.S. government via TreasuryDirect. Options include government bonds, municipal bonds, and corporate bonds, each with different risk and return profiles. Bond ETFs and mutual funds also offer fixed-income exposure without purchasing individual securities.

Mutual funds are typically accessed through brokerage accounts, retirement plans like 401(k)s, or directly from fund companies such as Vanguard or T. Rowe Price. They are available in a wide range of strategies, from stock-focused to bond-heavy or blended portfolios. Some funds require minimum investments, while others are accessible with low entry points, especially in retirement accounts or robo-advisors that automatically allocate across asset classes.

Which Is Right for You?

Choosing between stocks, bonds, and mutual funds doesn’t require an all-or-nothing approach. Many investors build portfolios that include all three, balancing growth potential, income needs and risk tolerance.

Younger investors may lean more heavily on stocks to pursue long-term growth, while those closer to retirement might favor bonds for their relative stability and income. Mutual funds, particularly target-date or balanced funds, can simplify the process by offering diversified exposure in a single investment.

Taxes are part of the consideration. Owning mutual funds can expose investors to taxes on capital gains distributions. Investing in ETFs and stocks may may it easier to anticipate and manage taxable events.

The right mix often depends on your goals, time horizon, and comfort with market fluctuations. Regularly reviewing and adjusting your allocation can help keep your portfolio aligned with your evolving financial objectives.

Bottom Line

A couple meeting with a financial advisor to review their portfolio.

Each investment type offers a distinct approach to building wealth, and combining them allows for flexibility across changing market conditions and personal milestones. By blending different assets, investors can create a portfolio that reflects both their long-term goals and short-term needs. The mix doesn’t have to stay fixed—adjustments over time can reflect shifts in risk appetite, income requirements, or life stages.

Investment Planning Tips

A financial advisor can help you analyze investments and manage risk for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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