May
18
2024

What’s the Difference Between REITs and Real Estate Mutual Funds?

By | Growing Wealth, invest, Investing | Comments Off on What’s the Difference Between REITs and Real Estate Mutual Funds?

Real estate investment trusts (REITs) and real estate mutual funds offer exposure to property investments, but in different ways. A REIT is a legal entity that owns and operates income-producing real estate and is required to pay dividends, while a real estate mutual fund is a pooled investment vehicle.

Key Points

•   REITs and real estate mutual funds offer exposure to property investments in different ways.

•   REITs are legal entities that own and operate income-producing real estate and pay dividends to shareholders.

•   Real estate mutual funds are pooled investment vehicles that invest in the real estate sector through various assets.

•   REITs can own different types of properties, while real estate mutual funds can invest in REITs, individual properties, and mortgage-backed securities.

•   The differences between REITs and real estate mutual funds lie in their structure, investment strategies, taxation, and management styles.

What Is a REIT?

A REIT is a trust that invests in real estate, typically through direct ownership. Those properties generate rental income, which is paid out to REIT shareholders in the form of dividends. The types of properties REITs may own can include:

•   Hotels and resorts

•   Self-storage facilities

•   Warehouses

•   Commercial office space

•   Retail space

•   Apartment buildings

•   Strip malls

Some REITs take a different approach in how they generate returns for investors. Rather than owning income-producing property, they may invest in mortgage loans and mortgage-backed securities. A third category of REITs employs a hybrid strategy, investing in both properties and mortgages.

REITs may be publicly traded on an exchange, similar to a stock, or they may be registered with the SEC but not publicly traded. This second category of REITs can also be referred to as non-traded REITs. Regardless of how they’re classified, REITs are considered alternative investments.

💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alternative assets through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

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now for the rest of us.

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What Is a Real Estate Mutual Fund?

A real estate fund is a type of mutual fund that’s focused on the real estate sector. Mutual funds are pooled investment vehicles that allow multiple investors to buy shares and gain access to underlying investments. What a real estate mutual fund invests in can depend on its objective.

Real estate fund investments may include:

•   REITs

•   Individual properties

•   Mortgages and mortgage-backed securities

A fund manager determines which investments to hold inside the fund. The frequency with which fund assets turn over can depend on whether it uses an active or passive management strategy.

Real estate funds can pay out dividends to investors, though not all of them do. Some real estate funds are exchange-traded funds (ETFs), meaning they have the structure of a mutual fund but trade on an exchange like a stock.

Like most funds, real estate mutual funds have annual fees in the form of expense ratios.

What Are Key Differences Between REITs and Real Estate Mutual Funds

The most significant differences between REITs and real estate funds lie in how they operate, how they generate returns for investors, and how they’re taxed. While both have the same overall goal of leveraging real estate for returns, they don’t approach that goal the same way.

How They’re Structured

REITs are companies that either own and operate income-producing real estate, invest in mortgages and mortgage-backed securities, or a mix of both. To qualify as a REIT, the company must pay out at least 90% of its taxable income annually to investors as dividends.

A real estate fund is structured as a pooled investment vehicle that can hold dozens of different investments. Many real estate funds concentrate holdings on REITs, with some focusing on a specific niche, such as commercial office buildings or shopping centers. Other real estate funds may hold real estate stocks.

Both REITs and real estate funds may be actively or passively managed. With an active management strategy, the fund manager’s goal is to beat the market. Passive management, on the other hand, aims to track the performance of an underlying benchmark. Real estate index funds, for example, may try to match the returns of the Dow Jones U.S. Real Estate Index (DJUSRE).

How They’re Taxed

How a REIT generates its income can determine how dividends paid to investors are treated for tax purposes. In most instances, dividends that result from the collection of rent payments are treated as ordinary income for the investor. If a REIT sells a property at a profit, however, those dividends would be treated as capital gains.
Investors who own REIT shares should receive a Form 1099-DIV each year that breaks down:

•   Dividends from ordinary income

•   Qualified dividends

•   Capital gains

•   Payments for return of capital

Qualified dividends are taxed at the long-term capital gains tax rate. This rate is lower than ordinary income tax rates for certain taxpayers.

Real estate mutual funds can also generate a Form 1099-DIV for investors when there are taxable distributions to report. Investors have to pay tax on income and/or capital gains they receive from the fund, including:

•   Dividends

•   Interest payments

•   Capital gains from the sale of underlying assets

Ordinary dividends are taxed as ordinary income, while qualified dividends qualify for the long-term capital gains tax rate. Interest is also taxed as ordinary income in most cases, while capital gains are subject to the short- or long-term capital gains tax rate, depending on how long the assets were held.

Recommended: How Are Mutual Funds Taxed?

Key Investment Considerations

When debating whether to invest in a REIT vs. mutual fund, it’s important to consider your objectives, risk tolerance, and time horizon. Specifically, you may want to ask yourself the following:

•   Is it more important to collect dividends for passive income or realize gains through capital appreciation?

•   What degree of risk are you comfortable taking?

•   Which real estate sectors are you seeking exposure to?

•   How much capital do you have available to invest in REITs or real estate funds?

•   How long do you plan to hold real estate investments in your portfolio?

It’s also helpful to look at the specifics of individual investments. For instance, if you’re interested in a REIT, you’d want to consider its past performance and typical dividend payout, the types of properties it owns, how the REIT is structured, and the fees you might pay.

With a real estate fund, it’s also important to look at the underlying assets and the fund manager’s strategy. While past performance isn’t a guarantee of future returns, it can give you insight into how the fund has moved in prior years. It’s also wise to check the expense ratio to see what owning the fund might cost.

Are There Similarities Between REITs and Real Estate Mutual Funds?

REITs and real estate funds are similar in two key ways. They’re both pathways to diversifying with real estate and in most cases, they’re highly liquid investments.

If you’re interested in leveraging the benefits of real estate investments in a portfolio but don’t want to own property directly, a REIT or real estate fund can help you accomplish your goal. How wide or narrow the scope of those investments ends up being can depend on the REIT or fund’s overall strategy.

Publicly traded REITs and real estate funds are relatively easy to trade. You just need a brokerage account to buy and sell either one on an exchange. If you were to buy a fix-and-flip property or a rental property, on the other hand, it could be more challenging to unload the investment once you’re ready to exit.

💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

Risks and Role of Real Estate in Your Portfolio

Real estate investments in general can act as an inflationary hedge in a portfolio. When consumer prices rise, rents tend to move in tandem. Real estate also has a lower correlation overall with the stock market, providing some added insulation against volatility.

However, there are risks involved in real estate investing, either through a REIT or real estate fund. The biggest risk factors include:

•   Declines in property values

•   Fluctuations in interest rates

•   Demand for properties

Liquidity risk can also become an issue for REITs or real estate funds that have low trading volume. Building a diversified portfolio that includes real estate as one small slice can help with managing those risks. Evaluating your risk tolerance can help you decide how much of your portfolio to commit to REITs or real estate funds.

The Takeaway

REITs and real estate funds can play an important role in an investment portfolio if you’re hoping to move beyond stocks and bonds. Familiarizing yourself with how each one works and the potential risks is a good place to start. Once you’ve decided whether to invest in REITs, real estate funds, or both you can take the next step and open a brokerage account to start trading.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Are REITs a good investment?

REITs can be a good investment if the underlying assets perform well and generate consistent dividend income for investors. But there are no guarantees, and the real estate market comes with its own risks. Thus it’s important to consider the tax implications and the potential risks of REIT investing before getting started.

Are real estate funds a good investment?

A real estate fund can be a way to invest in property (or properties) without direct ownership. It’s possible to diversify a portfolio with multiple property types or sectors using only a couple of funds. Investors can benefit from dividends, capital appreciation, or a mix of both. But the real estate market is subject to interest rate risk, fluctuating trends, and more.

What are the risks associated with REITs and real estate funds?

The real estate market may not be influenced by the stock or bond markets, but real estate values can also be volatile, and prices in certain property sectors — or geographic areas — can rise and fall just as suddenly as equities. When investing in real estate directly or indirectly through REITs or real estate funds, be sure to do your due diligence about relevant risk factors.

Can you lose money investing in a REIT or real estate fund?

Yes, it’s possible to lose money in any type of investment, including real estate-related instruments like REITs and real estate mutual funds and ETFs. The underlying properties are not guaranteed to provide investors with a profit, so it’s important to understand what you’re investing in before you do so.

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SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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May
18
2024

What Is an Interval Fund?

By | invest, Investing, Terminology | Comments Off on What Is an Interval Fund?

Interval funds are closed-end mutual funds that don’t trade publicly on an exchange. These funds are so named because they offer to repurchase a percentage of outstanding shares at periodic intervals.

Investing in interval funds can be attractive since they have the potential to generate higher yields. However, they’re less liquid than other types of funds, owing to the restrictions around when and how you can sell your shares.

Key Points

•   Interval funds are closed-end mutual funds that offer to repurchase a percentage of outstanding shares at periodic intervals.

•   Investing in interval funds can generate higher yields but they are less liquid compared to other funds.

•   Interval funds make periodic repurchase offers to shareholders based on a schedule set in the fund’s prospectus.

•   Interval funds may hold a variety of underlying investments such as private credit, real estate, private equity, venture capital, and infrastructure.

•   Interval funds differ from closed-end funds and mutual funds in terms of trading on an exchange, initial public offering, and liquidity.

How Do Interval Funds Work?

Interval funds are alternative investments that work by making periodic repurchase offers to shareholders according to a schedule set in the fund’s prospectus.

Shareholders are not obligated to accept the offer but if they do, they receive a share price that’s based on net asset value (NAV). Repurchase intervals may occur quarterly, biannually, or annually.

These funds typically rely on an active management strategy, which is designed to produce returns that outpace the market. But because of the types of investments held by interval funds, as well as the fund’s structure, the trade-offs are potentially higher risk and far less liquidity.

💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

What Types of Assets Do Interval Funds Hold?

Interval funds may hold a variety of underlying investments that are different from what traditional funds may invest in, which is partly why interval funds are considered a form of alternative investing. An interval fund’s prospectus should include a detailed account of its underlying assets to help investors better understand what they’re investing in.

Recommended: Alternative Investment Guide

Private Credit

Private credit refers to lending that occurs outside the scope of traditional banking. Rather than going through a bank for a loan, businesses gain access to the capital they need through private lending arrangements.

Also referred to as direct lending or private debt, private credit helps to fill a void for businesses that have been unable to secure traditional financing. Private credit can also offer investors an opportunity, as private credit generates returns for investors in the form of interest on the loans.

Real Estate

Real estate can be an attractive investment for investors who are seeking an inflationary hedge with low correlation to the stock market. Interval funds may invest in private real estate investment trusts (REITs), private real estate funds, commercial properties, and land. Some real estate interval funds focus on real estate debt investments.

Private Equity

Private equity refers to investments in companies that are not publicly traded on an exchange. Private equity funds pool capital from multiple investors to purchase companies, overhaul them, and sell them at a profit. This type of investment can prove risky, as there are no guarantees that the company’s value will increase but if it does, the rewards for investors can be great.

Venture Capital

Venture capital is a form of private equity in which investors provide funding to startups and early-stage businesses. In exchange, investors receive an equity stake in the company. Venture capitalists have an opportunity to make their money back once the company goes public by selling their shares.

Infrastructure

Infrastructure interval funds invest in the mechanisms, services, and systems that make everyday life possible. Investments are focused on:

•   Transportation

•   Energy and utilities

•   Housing

•   Healthcare

•   Communications

These types of investments can be attractive as they tend to produce stable cash flow since a significant part of the population relies on them.

How Does the Repurchase Process Work?

An interval fund makes repurchase offers according to the schedule set in the prospectus. Shareholders should be given advance notice of upcoming repurchase offers and the date by which they should accept the offer if they prefer to do so. The fund should also specify the date at which the repurchase will occur.

In terms of the timing, it may look something like this:

•   Once shareholders are notified of an upcoming repurchase offer, they have three to six weeks to respond.

•   After the acceptance deadline passes, there may be a two-week waiting period for the repurchase to occur.

•   Investors who accepted the repurchase offer may have up to a one-week wait to receive proceeds owed to them.

The price shareholders receive is based on the per share NAV at a set date. A typical repurchase offer is 5% to 25% of fund assets. interval funds may collect a redemption fee of up to 2% of repurchase proceedings. This fee is paid to the fund to cover any expenses related to the repurchase.

What’s the Difference Between an Interval Fund and a Closed-End Fund?

Closed-end funds issue a fixed number of shares, with no new shares issued later (even to keep up with demand from investors). An interval fund is categorized as a closed-end fund legally. However, interval funds don’t behave the same way as other closed-end funds. Specifically:

•   There’s typically no initial public offering (IPO)

•   Interval funds do not trade on an exchange

•   Investors can purchase shares at any time

The third point makes interval funds more like open-end funds, but there’s a key difference there as well. Interval funds can hold a much higher percentage of assets in illiquid investments than open-end funds.

What’s the Difference Between an Interval Fund and a Mutual Fund?

Interval funds are different from traditional mutual funds, which are also a type of pooled investment. With a mutual fund, investors can buy shares to gain exposure to a wide variety of underlying assets. The fund may pay out dividends to investors or offer the benefit of long-term capital appreciation.

Investors can buy mutual fund shares at any time, but unlike an interval fund, these shares trade on a stock exchange. The fund’s share price is set at the end of the trading day. Mutual funds can offer greater liquidity to investors since you can buy shares one day and sell them the next day or even the same day.

Interval funds don’t offer that benefit as you must wait until the next repurchase date to sell your shares. An interval fund may also be more expensive to own compared to a mutual fund, as there are often additional costs that apply.

Investor Considerations

If you’re interested in alternative investments and you’re considering interval funds, there are some important things to keep in mind.

•   What is the minimum investment required and can you meet it?

•   How does your risk tolerance align with the risk profile of the fund you’re weighing?

•   What is the schedule for repurchase offers and how does that align with your liquidity needs?

•   How much will you pay to invest in the fund?

•   What is your target range for returns?

Due to their illiquid nature, it may not make sense for the average investor to tie up a large part of their portfolio in interval funds. It’s also important to keep in mind that the minimum investment may be in the five-figure range, which is often well above the minimum needed to trade mutual fund shares.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Potential Upside

The potential upside of interval funds is the possibility of earning returns that beat the average return of the stock market. Depending on the fund’s strategy and underlying investments, it’s possible to realize returns that are substantially higher than what you might get with a traditional open-end mutual fund.

Interval funds can add diversification to a portfolio and give you access to illiquid investments that might otherwise be closed off to you. While there are risks involved, interval funds may be less susceptible to market volatility as they have a lower correlation to stocks overall.

Although lack of liquidity may be problematic for some investors, it can benefit others who may be tempted to give in to investing biases. Since you can’t easily sell your shares, interval funds can prevent you from making panic-driven decisions with this segment of your portfolio.

Recommended: Why Portfolio Diversification Matters

Possible Risks

Much of the risk associated with interval funds lies in their underlying investments. If a fund is investing in private credit or venture capital, for example, and the companies the fund backs fail to become profitable, that can directly impact the returns you realize as an investor.

As mentioned, liquidity risk can also be an issue for investors who don’t want to feel locked into their investments. Even if you’re comfortable with only being able to redeem shares at certain times, there’s always market risk which could negatively affect the NAV share price you’re offered.

The Takeaway

Interval funds can be rewarding to investors, but they’re more complex than other types of mutual funds or exchange-traded funds. Weighing the pros and cons is an important step in deciding whether to invest. You may also consider talking it over with a financial advisor before adding interval funds to your portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Are interval funds a good investment?

Interval funds may be a good investment for investors who are comfortable with higher risk exposure given the potential to earn higher rewards. The complexity of these alternative investments may make them less suitable for individuals who are just getting started with building a portfolio.

What’s the difference between an interval fund and an ETF?

An exchange-traded fund (ETF) is a type of mutual fund that trades on an exchange like a stock; an interval fund is a closed-end fund that doesn’t trade on an exchange. ETFs can offer exposure to a pool of different investments, including some of the same illiquid investments that an interval fund may hold. But whereas the majority of ETFs are passively managed, most interval funds have an active portfolio manager.

Do interval funds pay dividends?

Interval funds can pay dividends though they’re not required to do so. When collecting dividends from an interval fund or any other type of mutual fund, it’s important to understand how that income will be treated for tax purposes.

Photo credit: iStock/sofirinaja

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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May
18
2024

Can a Roth IRA Be Used for College Expenses?

By | Going to College, invest, Investing | Comments Off on Can a Roth IRA Be Used for College Expenses?

A Roth IRA can be used to pay for college expenses, and it is possible to do so without incurring taxes or penalties. However, there are disadvantages of using a Roth IRA for college, and it’s important to weigh the pros and cons.

A Roth IRA is designed to help individuals save for retirement. While you can also use a Roth IRA for college expenses, you’ll want to understand the potential ramifications.

Here’s what you need to know about using a Roth IRA for college, plus other college savings options, to help make the best decision for your situation.

Key Points

•   Early withdrawals from a Roth IRA for qualified higher education expenses can be made without penalties.

•   Pros of using a Roth IRA for college include reducing the need for student loans and avoiding the 10% penalty.

•   Cons include impacting retirement savings and potential loss of compounding returns.

•   Comparatively, a 529 plan offers higher contribution limits and potential tax benefits.

•   Choosing between a Roth IRA and a 529 plan depends on individual financial needs and goals.

Can You Use a Roth IRA for College?

You can use a Roth IRA to help pay for college. However, as mentioned, a Roth IRA is primarily a vehicle for saving for retirement. You contribute after-tax dollars to the account (meaning you pay taxes on the contributions in the year you make them), and the money in the Roth IRA grows tax-free. You can generally withdraw the funds tax-free starting at age 59 ½. However, if you withdraw the money early, you may be subject to a 10% penalty.

But there are some ways to make early withdrawals from your Roth IRA to help pay for college without being penalized. Because you contribute to a Roth IRA with after-tax dollars, you can withdraw the contributions (but not the earnings) you’ve made to a Roth at any time without paying a penalty. You could then use those contributions to help pay for college.

Just be aware that there are annual contribution limits to a Roth IRA. In tax year 2023, you can contribute up to $6,500 (or $7,500 if you’re 50 or older), and in 2024 you can contribute up to $7,000 ($8,000 for those 50 or older). How much you’ve contributed will affect how much you have in contributions to withdraw, of course.

Another way to use a Roth IRA to pay for college without being penalized is by taking advantage of one of the Roth IRA exceptions that allow you to withdraw money from your account early. One of the exceptions is for qualified higher education expenses.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Do You Have To Pay Penalties if You Use a Roth IRA for College?

Typically, if you take out money from your Roth IRA before age 59 ½ , you will be subject to taxes and penalties. However, IRA withdrawal rules grant a few exceptions to this rule, and one of the exceptions is for qualified higher education expenses.

If you pay qualifying higher education expenses to a qualified higher education institution for your child, yourself, your spouse, or your grandchildren, you won’t have to pay the 10% penalty for withdrawing funds from a Roth IRA. Qualified higher education expenses include things like tuition, fees, books and supplies. However, you will still have to pay taxes on any earnings you withdraw from your Roth IRA.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Pros and Cons of Using a Roth IRA for College

Whether using a Roth IRA for college is right for you depends on your particular situation. Here are the pros and cons you’ll want to consider.

Pros of Tapping Into a Roth IRA for College

Advantages of using a Roth IRA for college expenses include:

•   You might not have to borrow as much money to pay for college. Using a Roth IRA for college expenses may reduce the need for student loans. And for some students, using money from a Roth IRA might make the difference between being able to afford to attend college or not.

•   You won’t be penalized for withdrawing the money. Because of the exception for qualified higher education expenses, you can take out the money to pay for those expenses without having to pay the 10% penalty.

•   If you withdraw just your contributions, you won’t owe taxes on that money.

Cons of Tapping Into a Roth IRA for College

These are the drawbacks of using a Roth IRA to pay for college:

•   Your retirement savings will take a hit. This is the biggest disadvantage of using the money in a Roth IRA for college. While there are other ways to help cover the cost of college, there are generally fewer options to help you save for retirement if you spend your Roth IRA funds on college expenses.

•   Because of possible compounding returns, even a few thousand dollars withdrawn from your Roth IRA today might mean missing out on tens of thousands of dollars of potential growth by the time you’re ready to retire years from now.

•   Eligibility for financial aid could be affected. Another possible downside of using a Roth IRA for college is that the money you withdraw generally counts as income on the FAFSA (Federal Application for Federal Student Aid). That may limit financial aid you could receive, including grants and loans.

Roth IRA vs 529 for College

Before you decide to use a Roth IRA for college savings, you might want to consider a 529 plan. With a 529, you can save money for your child to go to college and withdraw the funds tax-free as long as they’re used for qualified higher education expenses.

A 529 plan has more generous contribution limits than a Roth IRA does, and other extended family members may also contribute to the plan. In addition, while 529 contributions aren’t deductible at the federal level, many states provide tax benefits for 529s.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Which College Expenses Can a Roth IRA Be Used For?

According to the IRS, a Roth IRA can be used to pay for qualified higher education expenses. These qualified expenses include tuition, fees, books and supplies, and equipment required for enrollment or attendance.

The Takeaway

It’s possible to use a Roth IRA to help pay for qualified higher education expenses, and you typically won’t be subject to a penalty for doing so. However, taking funds out of your Roth IRA means you won’t have that money available for retirement. You’ll also lose out on any gains that may have compounded throughout the years. That could impact your retirement savings or even delay your retirement date.

Instead of using a Roth IRA for college, you may want to consider other ways to save for college that might better fit your financial needs, such as a 529 plan. That way you can save for both college and retirement.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Can you use a Roth IRA for college?

Yes, it is possible to use a Roth IRA for college expenses. If you withdraw money from a Roth IRA for qualified higher education expenses, you generally will not be subject to the 10% early withdrawal penalty. Tuition, fees, books, supplies, and equipment needed for enrollment or attendance are usually considered qualified expenses.

Is a Roth IRA better than a 529 for college?

Deciding whether to use a 529 plan or a Roth IRA for college will depend on your specific financial situation. In many cases, a 529 plan may make more sense than a Roth IRA for college savings. You can generally contribute more to a 529 plan each year than you can to a Roth IRA, there are tax advantages to the plan, and other relatives can also contribute to it. Plus, by using a 529, you won’t be taking money from your retirement savings.

Can I withdraw from my IRA for college tuition without penalty?

Yes, you can use a Roth IRA to pay for college tuition without penalty in most cases because tuition is generally considered a qualified higher education expense. However, to avoid taking money from your retirement savings, you may want to consider other college saving options instead, such as a 529 plan.

Photo credit: iStock/Tempura

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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May
18
2024

Catch-Up Contributions, Explained

By | invest, Investing, Preparing for Retirement | Comments Off on Catch-Up Contributions, Explained

Catch-up contributions allow individuals 50 and older to contribute additional money to their workplace retirement savings plans like 401(k)s and 403(b)s, as well as to individual retirement accounts (IRAs).

Catch-up contributions are designed to help those approaching retirement age save more money for their retirement as they draw closer to that time.

Learn how catch-up contributions work, the eligibility requirements, and how you might be able to take advantage of these contributions to help reach your retirement savings goals.

Key Points

•   Catch-up contributions allow individuals 50 and older to contribute additional money to their workplace retirement savings plans and individual retirement accounts (IRAs).

•   Catch-up contributions were created to help older individuals “catch up” on their retirement savings if they haven’t been able to save enough earlier in their careers.

•   The catch-up contribution limits for 2023 and 2024 vary depending on the retirement savings plan, such as 401(k), 403(b), and IRAs.

•   To be eligible for catch-up contributions, individuals need to be age 50 or older, and certain retirement plans may have additional allowances based on years of service.

•   Catch-up contributions can provide benefits such as increased retirement savings, potential tax benefits, and additional financial security as retirement approaches.

What Is a Catch-Up Contribution?

A catch-up contribution is an additional contribution individuals 50 and older can make to a retirement savings plan beyond the standard allowable limits. In addition to 401(k)s, 403(b)s, and IRAs, catch-up contributions can also be made to Thrift Savings Accounts, 457 plans, and SIMPLE IRAs.

Catch-up contributions were created as a provision of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. They were originally planned to end in 2010. However, catch-up contributions became permanent with the Pension Protection Act of 2006.

The idea behind catch-up contributions is to help older individuals who may not have been able to save for retirement earlier in their careers, or those who experienced financial setbacks, to “catch up.” The additional contributions could increase their retirement savings and improve their financial readiness for their golden years.

While employer-sponsored retirement plans are not required to allow plan participants to make catch-up contributions, most do. In fact, nearly all workplace retirement plans offer catch-up contributions, according to a 2023 report by Vanguard.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with an IRA account. The money you save each year in a Traditional IRA is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Catch-Up Contribution Limits: 2023-2024

Each year, the IRS evaluates and modifies contribution limits for retirement plans, primarily taking the effects of inflation into account. The standard annual contribution limit for a 401(k) in 2023 is $22,500, and $23,000 for 2024. For a traditional or Roth IRA, the standard contribution limit is $6,500 in 2023, and for 2024 the limit is $7,000.

Catch-up contributions can be made on top of those amounts. Here are the catch-up contribution limits for 2023 and 2024 for some retirement savings plans.

Plan 2023 Catch-Up Limit 2024 Catch-Up Limit
IRA (traditional or Roth) $1,000 $1,000
401(k) $7,500 $7,500
403(b) $7,500 $7,500
SIMPLE IRA $3,500 $3,500
457 $7,500 $7,500
Thrift Savings Account $7,500 $7,500

This means that you can make an additional $7,500 in catch-up contributions to your 401(k) for a grand total of up to $30,000 in 2023 and $30,500 in 2024. And with traditional and Roth IRA catch-up contributions of $1,000 for both years, you can contribute up to $7,500 in 2023 and $8,000 in 2024 to your IRA.

Catch-Up Contribution Requirements

In order to take advantage of catch-up contributions, individuals need to be age 50 or older — or turn 50 by the end of the calendar year. If eligible, they can make catch-up contributions each year after that if they choose to — up to the annual contribution limit.

Certain retirement plans may have other allowances for catch-up eligibility. For instance, with a 403(b), in addition to the catch-up contributions for participants based on age, employees with at least 15 years of service may be able to make additional contributions, depending on the rules of their employer’s plan.

To maximize the advantages of catch-up contributions, it’s a good idea to become familiar with the rules of your plan as part of your retirement planning strategy.

Benefits of Catch-Up Contributions

There are a number of benefits to making catch-up contributions to eligible retirement plans.

•   Increased retirement savings: By helping to make up for earlier periods of lower contributions to your retirement savings plan, catch-up contributions allow you to increase your savings and potentially grow your nest egg in the years closest to retirement.

•   Possible tax benefits: Making catch-up contributions may help lower your taxable income for the year you make them. That’s because contributions to 401(k)s and traditional IRAs are made with pre-tax dollars, giving you a right-now deduction. And contributions beyond the standard limits could lower your taxable income for the year even more. (Of course, you will pay tax on the money when you withdraw it in retirement, but you may be in a lower tax bracket by then.)

•   Additional security: Making catch-up contributions may give you an extra financial cushion as you approach retirement age. And those contributions may add up in a way that could surprise you. For instance, if you contribute an additional $7,500 to your retirement account from age 50 to 65, assuming an annualized rate of return of 7%, you could end up with more than $200,000 extra in your account.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How to Make Catch-Up Contributions

To make catch-up contributions to an employer-sponsored plan, contact your plan’s administrator or log into your account online. The process is typically incorporated into a retirement savings plan’s structure, and you should be able to easily indicate the amount you want to contribute as a catch-up.

To make IRA catch-up contributions, contact your IRA custodian (typically the institution where you opened the IRA) to start the process. In general, you have until the due date for your taxes (for example, April 15, 2024 for your 2023 taxes) to make catch-up contributions.

Finally, keep tabs on all your retirement plan contributions, including catch-ups, to make sure you aren’t exceeding the annual limits.

The Takeaway

For those 50 and up, catch-up contributions can be an important way to help build retirement savings. They can be an especially useful tool for individuals who weren’t able to save as much for retirement when they were younger. By contributing additional money to their 401(k) or IRA now, they can work toward a goal of a comfortable and secure retirement.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Do you get employer match on catch-up contributions?

It depends on whether your plan allows employer matching for catch-up contributions. Not all plans do. Even if your employer does match catch-up contributions, they might set a limit on the total amount they will match overall. Check with your plan administrator to find out what the rules are.

Are catch-up contributions worth it?

Catch-up contributions can be beneficial to older workers by helping them potentially build a bigger retirement nest egg. These contributions may be especially helpful for those who haven’t been able to save as much for retirement earlier in their lifetime. Making catch-up contributions might also provide them with tax benefits by lowering their taxable income so that they could possibly save even more money.

How are catch-up contributions taxed?

For retirement savings plans like 401(k)s and traditional IRAs, catch-up contributions are typically tax deductible, lowering an individual’s taxable income in the year they contribute. However, catch-up contributions to Roth IRAs are made with after-tax dollars. That means you pay taxes on the money you contribute now, but your withdrawals are generally tax-free in retirement.

Photo credit: iStock/mapodile
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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May
18
2024

Mutual Funds vs Stocks: Differences and How to Choose

By | Growing Wealth, invest, Investing | Comments Off on Mutual Funds vs Stocks: Differences and How to Choose

Mutual funds provide a collection of many investments in a single basket, while stocks allow you to own shares in individual companies.

Either type of asset can help you reach your investing goals — and of course it’s possible to own mutual funds shares as well as stocks. But there are advantages and disadvantages to mutual funds vs. stocks.

Key Points

•   Mutual funds offer a diversified portfolio in a single investment, whereas stocks are shares in individual companies.

•   Mutual funds can be actively or passively managed, with some tracking market indexes.

•   Stocks provide direct ownership in a company, offering potential for higher returns and greater risk.

•   Mutual funds are managed by professionals, making them a good option for those who prefer not to manage their investments.

•   The choice between mutual funds and stocks depends on individual financial goals, risk tolerance, and investment strategy.

What’s the Difference Between Mutual Funds and Stocks?

The biggest difference between a mutual fund and a stock lies in what you own: a mutual fund is a type of pooled investment fund, and a stock refers to shares of ownership in a single company.

Mutual funds can hold multiple investments in a single vehicle (e.g. stocks, bonds, or other assets). Sometimes a mutual fund can hold a mix of stocks, bonds, and short-term debt; these are called blended funds.

Different Types of Mutual Funds

Another difference between mutual funds vs. stocks: Mutual funds can be structured in a variety of ways. Often, a mutual fund manager is responsible for choosing the investments the fund holds, according to the fund’s objectives and investment strategy. But not all funds are actively managed funds; some are passively managed and track a market index (see bleow).

Some types of mutual funds include:

•   Equity funds: These funds can hold the stocks of hundreds of companies. An equity fund typically has a specific focus, e.g. large-cap companies, tech companies, and so on.

•   Bond funds: These provide access to various types of bonds. Similar to equity funds, bond funds can offer exposure to different sectors, e.g. green bonds, short-term bonds, corporate bonds, etc.

•   Target-date funds: Often used in retirement plans, target-date funds use algorithms to adjust their holdings over time to become more conservative.

•   Index funds: Index funds are designed to track or mirror a specific market index, e.g. the S&P 500, the Russell 2000, and so on. These are considered passive vehicles vs. mutual funds that are led by a team of portfolio managers.

•   Exchange-traded funds (ETFs): ETFs are similar to mutual funds in that they hold a variety of different securities, but shares of these funds trade throughout the day on an exchange similar to stocks.

What Are Stocks?

Simply put, a stock represents an ownership share in a single company. There’s no fund manager here; you decide which stocks you want to buy or which ones you want to sell, often using a brokerage account. You might buy 10 shares of one company, 50 shares of a second, and 100 shares of a third — it’s up to you.

Just as there are different types of mutual funds, there are different types of stocks that reflect the underlying company. For example, your portfolio might include:

•   Value stocks: Companies that are trading lower than their potential value, based on fundamentals.

•   Growth stocks: Companies with a track record of steady growth.

•   Dividend stocks: Companies that payout a portion of their earnings to shareholders in the form of dividends. Note that value stocks often pay dividends, but growth stocks tend to reinvest their profits (per their name) toward growth and expansion.

Here’s another way to think of the differences between mutual funds and stocks. If a mutual fund is a carton of eggs, a stock is one egg in that carton.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

*Probability of Member receiving $1,000 is a probability of 0.028%.

Pros and Cons of Mutual Funds

Investing in mutual funds can be a good option for beginners who are ready to wade into the market but aren’t savvy about individual stocks just yet. There are, however, some downsides to keep in mind.

Pros

 Cons
Diversification is simplified Some funds may underperform
Easy access to the markets Higher minimum investments
May be cheaper than stocks Not all funds are low-cost

Pros of Mutual Funds:

•   Mutual funds make portfolio diversification easier. Diversifying your portfolio can help manage risk. When you buy a mutual fund, you get immediate diversification since the fund may hold a variety of securities or alternative investments.

•   Someone else makes the decisions. Choosing the right investments for a portfolio can be complicated for many investors, but a mutual fund takes care of the selection process. In the case of an active fund, the fund manager is in charge of buying or selling investments within the fund. A passive fund tracks an index, as mentioned above. Either way, all you have to do is invest your money.

•   Costs may be lower. When you invest in mutual funds, you’ll pay what’s called an expense ratio. This is a fee that represents the cost of owning the fund annually. While some funds are more expensive than others, there are plenty of low-cost options which means you get to keep more of your investment earnings.

Cons of Mutual Funds:

•   Performance isn’t guaranteed. While some actively managed mutual funds attempt to beat the market, others are structured to match the performance of an index. The main thing to know, however, is that results are never guaranteed, and your fund investments may fall short of expectations.

•   Minimum investments may be high. Some mutual funds have a low barrier to entry, and you can get started with a relatively small amount of money, especially if you invest via automatic deposits. Others, however, may require you to have a high minimum investment requirement (e.g. $5,000), which could be challenging if you’re a beginner. With stocks, on the other hand, it’s possible to buy fractional shares with as little as $1.

•   Potentially higher costs. Mutual fund expense ratios can vary widely, and some can be much more expensive than others. In general, active funds charge higher fees. In addition, some brokerages charge load fees to buy or sell funds which can add to your overall costs. It’s important to understand what you’re paying for your investments, as fees can eat into returns over time.

Pros and Cons of Individual Stocks

Investing in stocks might appeal to you if you’d like more control over where your money goes. But just as with mutual funds, there are some potential drawbacks to consider.

Pros

 Cons
High return potential Higher risk
Greater flexibility More difficult to diversify
Low costs More time-consuming

Pros of Individual Stocks:

•   Potentially earn higher returns. Owning individual stocks could lead to better results in your portfolio compared with mutual funds. It’s important to remember, however, that not all stocks offer the same rate of return, and performance of any stock (or any investment) is never guaranteed.

•   You’re in control. Investing in stocks means you have total control of what to buy and sell, and when to make trades. You’re not relying on a fund manager to make decisions for you. That’s something you might appreciate if you prefer a DIY or active approach to investing.

•   Trading costs may be low. When you buy and sell stocks, your brokerage can charge a commission fee each time. However, more brokerages are moving to a $0 commission-fee model for stock trades which can cut your investing costs down dramatically.

Cons of Individual Stocks:

•   Stocks are volatile. Mutual funds are often viewed as being less risky than stocks since you’re diversified across a range of securities. If you’re putting a large chunk of your portfolio into a smaller pool of stocks or just one company, you could be at risk of a major loss if volatility hits that part of the market.

•   Diversification is harder. When you invest in individual stocks, you may have to buy more of them to create a diversified portfolio. With a mutual fund, you don’t have to do that since you’re getting exposure to multiple investments in one fund.

•   Stock trading can be time intensive. Taking a buy-and-hold approach to stocks means you don’t have to pay as much attention to your portfolio. You can buy stocks, and then hang onto them for the long term. However, if you’re more interested in active trading then you’ll need to spend more of your day keeping up with stock trends and monitoring the markets so you don’t miss any opportunities to make gains.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Choosing Between Mutual Funds and Stocks

There’s no rule that says you must choose between mutual funds vs. stocks. Deciding which one to invest in can depend on your time horizon for investing, risk tolerance, and goals. And you might decide that both make sense in your portfolio.

Here’s a simple breakdown of how to compare the two when deciding where to invest.

Consider mutual funds if you…

 Consider stocks if you…
Want a simple way to build a portfolio under the guidance of an experienced fund manager who knows the market. Prefer to have more control of which companies you invest in, and when you buy or sell those investments.
Are more comfortable with the idea of generating returns over time vs. chasing the highest rewards of the moment. Want to leverage investments to produce the highest returns possible, even if it means taking a little more risk in your portfolio.
Don’t have the time or inclination to spend hours researching different investments or conducting in-depth market analyses. Are comfortable researching stocks on your own, and understand how to apply different types of technical analysis to evaluate them.

The Takeaway

Investing is one way to build wealth, but both mutual funds and stocks can help investors realize their financial goals — but in different ways. Weighing the pros and cons of mutual funds vs. stocks as well as your personal preferences for investing can help you decide how to build a portfolio that meets your needs.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.


Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Which is riskier, stocks or mutual funds?

Both stocks and mutual funds expose investors to the risk of loss, though the degree of risk can vary by investment. Mutual funds may help to distribute risk thanks to a diverse mix of underlying investments, while individual stocks can concentrate risk. However, it’s important to remember that you can lose money with either.

Which investment is best for beginners, mutual funds or stocks?

Mutual funds can be a good place for beginning investors to get started since they offer basic diversification. The key to choosing a mutual fund as a beginner is to consider the underlying investments in light of your own asset allocation, the fund’s track record, and the fees you’ll pay.

Are mutual funds worth it?

Mutual funds can be a worthwhile investment because they provide a cost-effective way to access a range of sectors that may align with your goals. For example, if you want to invest in big companies in the U.S., you can buy shares of a large-cap fund. If you want to invest in the environment, you can invest in a green bond fund or green tech equity fund.

Photo credit: iStock/Eva-Katalin


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0124121

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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