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. 

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 differences.

Stocks or Mutual Funds – 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 favor, its stock price can fall, resulting in investors losing money.

Investing in Mutual Funds vs Stocks – Which Gives 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 towards 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 (as of July 29, 2021)
Large-cap mutual funds239.11% – 339.83%
Large-cap stocks365.59% – 620.50%
Small-cap mutual funds349.25% – 739.83%
Small-cap stocks73.03% – 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. 

Stocks and Mutual FundsVariety 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 StocksCost 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 invest in it, you can visit https://www.navimutualfund.com/ 

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

Stock vs Mutual FundsTax 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 through 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 and 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 StocksMinimum 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.

Stocks and Mutual FundsTime 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 to manage 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.

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. 

Frequently Asked Questions 

Is a mutual fund the same as stock?

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.

Which is more profitable: shares or mutual funds?

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.

Is a mutual fund better than stocks?

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.

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