Mutual Funds Vs Stocks: 8 Key Differences Between Stocks Vs Mutual Funds

If you’re new to investing, you must have heard your peers or friends talking about mutual funds or stock investments. Some may suggest you invest in stocks, some would ask you to go for mutual funds, while some might have suggested that you invest in both. In this mutual funds vs stocks investment debate, you should make an informed decision before investing. Read this blog to know the difference between mutual funds and stock.

What is the Meaning of Stock Investment?

Stock investment refers to buying shares in ownership in a company. An investor can be a person or a company. 

Companies often fund their operations by selling their shares of stock and raising capital. When a firm sells stocks, it invites investors to buy fractional ownership, making them part owners. So, “stock” is a term used to describe a share in a company’s ownership.

Different Types of Stocks in India

There are different types of stocks in India depending on various parameters such as ownership, market capitalisation, dividend payments, risk, location and price trends.

Types depending on ownership

Preferred and Common: The basic difference between preferred and common stocks is that in preferred stocks a fixed dividend is promised every year. A common doesn’t offer this promise.

Hybrid: Hybrid stocks, also known as ‘Convertible Preferred Stocks’, are preferred stocks with an option to be converted into common stocks after a specific period of time.

Stocks with embedded- derivative options: This type of stock is not commonly available and can be either ‘callable’ or ‘putable’. A ‘callable’ stock can be brought back by the company at a certain time or price. A ‘putable’ stock can be sold by the stockholder to the company at a certain price or time.

Types depending on market capitalisation

Large-cap stocks: These are stocks of the top companies in India, usually the blue-chip companies. These stocks do not have a rapid growth scale but they give the benefit of relatively higher dividends as compared to small-cap and mid-cap stocks.

Mid-cap stocks: These are companies having a range of market capitalisation between Rs. 400 Crore and Rs. 2500 Crore. They provide the benefits of both good growth and stability in the market.

Small-cap stocks: The companies having a capitalisation range up to Rs. 250 Crore are small-cap stocks. These usually have high-risk factors as the market price volatility is high.

Types depending on dividend payment

Growth stocks: As the name suggests, these companies prefer to reinvest in their earnings. So, the dividend payments are low. But they have a high growth rate which benefits the investors by providing higher returns.

Income stocks: These stocks are ideal for investors with a low-risk appetite. They have a steady growth hence they provide higher dividends. Higher dividends benefit from higher income, hence the name ‘Income stocks’.

Types depending on fundamentals

Overvalued shares: Understandable from the name, these shares exceed the essential value and are overpriced.

Undervalued shares: These shares are exactly the opposite of the overvalued shares and the investors believe that the prices will grow in future.

Types depending on risk

Blue chip stocks: These stocks are the best choice among conservative investors who have a low-risk appetite. Blue chip companies have low to no liabilities in the market and stable dividend payments. They are usually large companies with a long history in the stock market.

iBeta stocks: Beta is the risk measurement which is calculated based on the market volatility of the stock. Beta can be positive or negative which mentions if it moves in sync with the market or in the opposite direction.

Types depending on price trends

Defensive stocks: These stocks are usually stable and are not bothered by the economic conditions. Hence they are preferred in poor economic conditions.

Cyclical stocks: These companies are just the opposites of defensive stocks. They are greatly affected by the economic conditions. These have rapid growth rates during an economic boom and very low growth during a poor economy. 

What is the Meaning of a Mutual Fund Investment?

Mutual fund investment refers to investments made in different types of bonds, stocks and other securities. An AMC or mutual fund company accumulates money from different investors and invests in various securities. There are various companies to invest in hence the risk is low due to a diverse portfolio. 

On the other hand, a mutual fund is an investment vehicle wherein an asset management company (AMC) creates a pool of wealth from investors. Then, it invests this collective amount in various types of assets, including stocks and bonds. 

With the basics of mutual funds vs stocks out of our way, let’s now dive into the difference between stocks and mutual funds.

Different Types of Mutual Fund Investments

There are different types of mutual funds based on structure, asset class, speciality, investment objectives and risk.

Types based on the structure

Open-ended funds: These funds do not have a maturity period and can be bought and sold throughout the year. These funds are actively managed and are actively managed by fund managers.

Close-ended funds: These have a specific maturity period and once purchased cannot be bought or sold to mutual funds, only in the stock market at prevailing prices.

Interval funds: They are somewhat a mixture of open and close-ended funds. They are open for the purchase and sale and specific intervals throughout the year. AMCs use the intervals to repurchase units from existing unitholders.

Types based on asset class

Equity funds: In equity funds, investors invest in equities or shares of a company. They come with high risk and high returns.

Debt funds: These funds invest in fixed-income assets such as government bonds and debentures. They provide fixed returns and have low risk factors.

Balanced or hybrid funds: These funds invest in mixed asset classes. This investment can be made in an equal ratio of equity and debt funds or one can be higher than the other. The returns and the risk are balanced out in this way.

Money market funds: Money market funds invest in liquid markets. They are good for investors who want immediate but moderate returns.

Types based on speciality

Index funds: These funds invest in instruments which track the fluctuations of a particular index such as BSE or NSE.

Sector funds: These funds invest in a particular sector of the market. Returns and risks are associated with the type of sector.

Fund of funds: These funds are also known as multi-manager funds as there are multiple funds in which a mutual fund invests in.

International funds: The companies of this fund are located in another country and are also known as foreign funds.

Emerging market funds: These funds invest in developing countries which show good growth potential. They are always at risk due to fluctuations in the economy.

Global funds: International and global funds have their basic difference as in global funds investors can invest in their own country.

Real estate funds: As the name suggests, these companies invest in real estate sectors.

Commodity focused stock funds: These funds invest in sectors which are focused on commodities and not directly in the commodities.

Market neutral funds: These funds are called market neutrals as they don’t invest directly in markets. Instead, they invest in ETFs, treasury bills etc.

Inverse or leveraged funds: These funds as the name sounds inverse in nature which is different from the traditional mutual funds. They tend to perform well when the market is down and shows loss when the market is going upwards.

Asset allocation fund: The fund manager invests in different types of securities like bonds and equity to get diversified returns.

Exchange traded funds: These funds are passively managed by the fund managers and offer a lot of liquidity. They are a mixture of both open and close-ended mutual funds and are traded on the stock market.

Gilt funds: The investors invest in government securities for a long duration and are almost risk-free.

Types based on investment objectives

Growth fund: Investors with long term investment and high return objectives invest in equity stocks under this fund.

Income fund: Under this scheme, investors invest in government bonds to get regular income.

Liquid funds: These funds invest in short or very short-term investments and are ideal for investors with low risk and moderate return appetite.

Tax-saving funds: These funds invest in equities and are eligible for tax deduction under the Income Tax Act.

Capital protection fund: Under this type, funds are divided between fixed income instruments and the equity market.

Fixed maturity funds: Under this type of fund, assets are invested in money market and debt securities.

Pension funds: Pension funds are investments made with an objective of fixed income after retirement and a long term investment goal. The returns earned from this fund can be taken as lump sum or pensions or both.

Types depending on risk

High-risk: These funds provide high returns but also have high risk. A good example would be inverse funds.

Medium risk: These funds offer high returns with moderate risk and are good for long-term investment goals.

Low risk: A good example of this type of fund will be debt funds. While the risk factor is low, the returns are also considerably low.

Mutual Funds vs Stocks – Which Involves more Risk?

As mutual funds invest in a basket of securities, they reduce the associated risk of investing in an individual asset such as a stock.

The risk factor is quite high in the case of stocks. If a company does not perform well or falls out of favour, its stock price can fall, resulting in investors losing money.

Also Read: Hybrid Mutual Funds

Investing in Mutual Funds vs Stocks – Which One Could Give Higher Returns?

Mutual funds allow you to earn very high to low returns, depending on the type of scheme chosen. However, they usually do not generate returns as significant as stocks. 

That’s why stocks are usually preferred by HNIs, i.e., those investing at least Rs. 2 lakhs. But, this approach to investing might not be suitable for new-to-investing individuals because of the extensive market knowledge required. 

Mutual funds are favoured in that regard. Professional managers run mutual funds after analysing market performance and the potential risks associated in order to maximise profits. 

The table below offers a comparison of return percentages when investing in stocks vs mutual funds:

Type of Investment	Return Percentage in 10 Years
Large-cap mutual funds	239.11% – 339.83%
Large-cap stocks	365.59% – 620.50%
Small-cap mutual funds	349.25% – 739.83%
Small-cap stocks	73.03% – 406.99%

*Note: These ranges are based on returns offered by the top 5 mutual funds and stocks in the respective categories, taken from Money Control and Bloomberg. 

Also Read: Different Types Of Mutual Funds

Mutual Funds vs Stocks – Variety of Options

When investing in stocks, one can choose from several options. Stocks are classified depending on various factors, such as the following:

• Market capitalisation: large-cap, mid-cap, and small-cap stocks
• Ownership: preferred, common, and hybrid stocks
• Price trends: cyclical and defensive stocks
• Dividend payment: growth and income stocks

On the other hand, investors can choose a mutual fund from the following options:

• Structure of the mutual fund: open-ended, close-ended, and interval funds
• Investment goals: growth funds, pension funds, tax-saving funds (ELSS), etc.
• Asset class: equity funds, hybrid funds, debt funds, etc.

Mutual Funds vs Stocks – Cost of Investing

Investors must pay an annual fee, called expense ratio, to AMCs against their portfolio management services. One may also incur entry and exit loads depending on a mutual fund scheme. 

SEBI has capped the expense ratio for mutual funds at 2.25%. However, schemes such as Navi Nifty 50 Index Fund features expense ratio as low as 0.06%. To explore a wide variety of low-cost mutual funds, you can visit Navi Mutual Fund.

Stocks involve brokerage fees, depository participant charges, security transaction tax, service tax, stamp duty, SEBI turnover charges, and charges for a Demat account. 

Mutual Funds vs Stock – Tax Implications

Both mutual funds and stocks offer returns in two forms: capital gains and dividends. 

Tax on capital gains

Capital gain refers to the profit realized by investors when they sell their mutual fund units or stocks at a higher price than what they purchased. 

An investor earns short-term capital gains when they sell stocks within 12 months of purchase. Conversely, when sold after 12 months, investors make long-term capital gains.

Capital gains earned from both equity mutual funds and stocks are taxed similarly. To know more about how short term and long term capital gains are taxed, take a look at taxation in mutual funds.

Tax on dividend income

Dividends are what companies pay to shareholders against their holdings at periodic intervals. Dividends up to Rs. 5000 in a fiscal are exempted from taxes. Above that, the dividend-paying company needs to deduct 10% tax. 

Tax exemptions

You do not get any tax benefit on investments in stocks. But if you invest in tax-saving mutual funds named equity-linked savings schemes (ELSS), you are eligible for a tax exemption of up to Rs. 1.5 lakhs per annum u/s 80C.

Mutual Funds vs Stocks – Investing Discipline 

Investment discipline refers to the plan you chalk out to achieve your financial goals, minimize risks, and reduce costs. 

In this regard, a mutual fund can help you through a systematic investment plan or SIP. A SIP is a method of investing in mutual funds by way of regular payments. Although the amount gets deducted automatically from your account on a preferred date every month, it still requires disciplined spending on your part. 

Achieving investment discipline can be tough with stocks as the investor carries out every transaction manually. 

Mutual Funds vs Stocks – Minimum Investment Size

One of the upsides of investing in mutual funds is having a diverse portfolio by investing in flexible and small chunks. The minimum investment amount can be as low as Rs. 500. 

You can build a diverse portfolio by investing in stocks directly as well. However, it would call for a relatively larger sum of money as you need to pay for the entire stock and not buy-in ratios. 

You can start investing in the Navi Nifty 50 index fund with a small amount of as low as Rs. 500 per month.

Mutual Funds vs Stocks – Time and Effort 

As mentioned earlier, the risk quotient is quite high in stocks. Therefore, investing in stocks requires considerable time and effort to research. Some key metrics include its issuing company’s value, price-to-earnings ratio, and size. 

In mutual funds, the fund manager spends a lot of time and effort managing a portfolio. As a result, investing in mutual funds does not require you to carry out extensive research. That said, to maximise returns, you must have a fundamental idea about a few parameters, such as a fund’s risk factor, associated costs, past performance, and the fund manager’s experience.

Mutual Funds Vs Stocks: Where Should Beginners Invest?

When it comes to beginners, they could go for mutual funds. The risks are quite less considering you have the option to invest in debt instruments like government bonds. Debt funds are low-risk funds but the returns are lower than equity funds. However, once you have started your investment journey, you can slowly start putting some of your money in stocks.

Benefits of Choosing Stock Investment over Mutual Funds

Investing in the stock market always comes with high risk as well as high returns. However, these depend on the type of stock investment you choose. For example, if you choose to invest in large-cap or blue-chip stocks, you will have a stable return and low-risk profile though the growth rate will be mediocre.

The first and foremost benefit of investing in mutual funds is they are actively managed by experts known as fund managers. So you will have a lower risk of loss. Also, the diversified portfolio helps to balance out the returns and risk. 

Final Word

Professionals manage mutual funds whereas trading in stocks is based on individual discretion. Additionally, mutual funds are ideal for new investors testing the waters in capital markets before trying their hand in stocks. Conversely, seasoned investors who have the expertise and time to evaluate companies’ financial statements along with a flair for research can consider building their portfolio of stocks. However, always remember that mutual funds are subject to market risk, read all sche-related documents carefully before investing.

FAQs on Mutual Funds vs Stocks 

Before you go…

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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.