Stocks vs Mutual Funds – Which is a Better Investment?
Should you invest in stocks or mutual funds? People new to investments often get confused about it. Before you jump to a conclusion, it is best to put to rest the stocks vs mutual funds debate.
This blog is a beginner’s guide to learning the differences between stocks and mutual funds and which one should you choose. Read on!
What are Stocks?
Shares of a company’s ownership are denoted by the term ‘stock’ or ‘equity’. Every share is equivalent to a unit of a company’s overall worth. When someone purchases shares, he or she becomes part owner of a company.
Companies sell shares of stock to raise capital to fund their growth and further expansion. When an individual buys stocks, he/she gains certain privileges from being a part owner of the company. For instance, he or she may gain voting rights at annual shareholder’s body meetings.
Moreover, they can receive payments from dividends and bonus shares when issued by the company. But most importantly, investors purchase stocks to make large profits from their capital appreciation.
What are Mutual Funds?
Mutual funds are professionally managed investment funds that pool money from numerous investors and invest in various assets like stocks, bonds, government securities, etc. Profits made from such investments are distributed to investors in proportion to the number of fund units they own.
Asset Management Companies (AMCs) also known as fund houses offer mutual funds and enable investors to select their preferred scheme. AMCs also employ fund managers who are in charge of formulating investment decisions on investors’ behalf to maximise returns.
The market regulator Securities and Exchange Board of India (SEBI) has introduced guidelines for the proper development of the mutual fund industry. It is responsible for passing regulations that protect the interest of investors and other stakeholders.
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Mutual Funds vs Stocks
The table below shows the differences between mutual funds vs stocks:
| Differentiating Parameters | Mutual Funds | Stocks |
| Risk | Risk is lower than stocks due to professional management. | Risk is higher in stock investments. |
| Returns | Mutual fund performance is subject to macroeconomic factors but fund managers strategize to provide stable and regular returns. | Returns generated by a stock depend on the state of the company, its industry and the general economy. |
| Diversification | Portfolio diversification is a major benefit offered by mutual funds. It helps in risk mitigation. | Investment is in a single company, resulting in higher risk. |
| Cost | Investors have to pay an expense ratio which is the cost of fund management. They may have to pay an exit load if they withdraw their investments before the stipulated time. | Only have to pay transaction charges for Demat and trading accounts. |
| Tax Benefits | Investors have to pay tax on capital gains only when they redeem their investment units. | Investors have to pay tax on dividends and capital gains for every sale transaction involving direct stocks. |
| Trading Time | Generally, trading takes place at the end of the day. | Trading of stocks takes place at prevailing prices throughout the day. |
| Minimum Investment | It varies from one fund house to another. Generally, the amount ranges from ₹500 to ₹5,000 | There is no regulation regarding the minimum investment amount in the stock market. |
Mutual Funds vs Stocks: Which is a Better Investment?
The answer to this would depend on the financial goals and risk profile of an individual investor. Through stocks, people can directly take exposure to the equity market, which has historically offered the highest returns. But, investors must keep constant track of how their stock investments are performing, to make appropriate decisions. It is the investor who completely bears the responsibility for risks and rewards.
If we look at mutual funds, we would see that apart from portfolio diversification, the provision of expert fund management is a significant benefit of mutual funds. As a result, investors do not have to constantly buy, sell and track their investments.
When it comes to choosing one option over the other, investors need to formulate the aim of their investment and assess their risk appetite. They also have to take into consideration the investment tenure. This is especially important as people can invest in both stocks and mutual funds for long, medium and short investment tenures.
Final Word
An important thing you need to keep in mind when comparing stocks vs mutual funds is that their returns do not determine which is better. This is because stocks generally have different entry points and investment styles which do not match with mutual funds. While both stocks and mutual funds have their pros and cons, mutual funds are easier and more convenient for beginners.
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FAQs
Ans: Mutual funds hold several investments – potentially tens of stocks – in one fund. Stocks are individual securities that represent an ownership share in the respective companies.
Ans: Shares are likely to offer more significant returns if bought and sold at the right time. Mutual funds also provide considerable returns after 3 – 5 years but are seldom at par with equity shares.
Ans: Investors prefer mutual funds over stocks as they offer easy diversification, professional portfolio management, and involve lower risks. Moreover, there are various mutual funds to choose from, helping investors achieve their financial goals in stipulated periods and with better consistency. In addition, mutual funds are ideal for individuals new to investments and capital markets.
Ans: Mutual funds are nothing but an accumulation of stocks. So the value of the funds is innately linked to the value of the shares. While buying or selling units, the value of the units is automatically affected.
Ans: When it comes to long term investment, mutual funds are preferred over stocks as they provide relatively stable returns and low risks. But then again, it depends on the type of both of these. For example, blue-chip stocks will provide greater returns and lower risk than equity funds.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
