Both mutual funds and stocks have their own benefits and work towards achieving inflation-beating returns. However, if you compare Mutual fund vs stocks, indeed, stocks are a bit risky compared to mutual funds.
Evaluating which one aligns the best with your investment style mainly depends on three parameters that you have to analyze before investing. The first thing to decide is what risk your tolerance versus how much return you are expecting or need. Indeed, a higher return will demand extra effort and risk associated with it. Let’s understand what these investment methods are and how to invest in shares and mutual funds.
What are Stocks and Mutual Funds?
When it comes to equity investing, a lot of beginners are in a dilemma about mutual fund vs share market which is best; i.e. whether they should directly invest in stocks or opt for a mutual funds route. That’s the reason why before delving into the pros and cons of both stocks and mutual funds, we should understand some basic terminologies related to them.
Mutual Funds: Mutual funds are essentially when investors with common investment objectives pool together their money to buy a lot of stocks (mutual funds can also include bonds or other securities, depending on the fund).
You own a share of the mutual fund, which entitles you to a share of some proportion. The proportion of ownership is reflected in the price of each mutual fund share which is known as the net asset value (NAV). That’s the total value of all the securities the mutual fund owns divided by the number of shares.
Stocks: Stock market investing means investing directly in the stocks of the company. When you buy stocks of any company, you are purchasing a proportion of the companies’ share listed on the stock exchange with an expectation to earn profits when the price of that stock goes up.
However, investors who are looking for extremely high returns, the stock investment seems to be a more attractive option compared to mutual fund investment. No doubt, there is a good chance of getting high returns if you have an investment in stocks, but not to mention, the risk quotient is also very high.
What to do if you are a Beginner Investor?
If you are new to investing with little or almost no experience in the financial markets, it is always advisable to start your equity investments initially with mutual funds as not only the risk factor is lesser but also because an expert called the fund manager makes the decisions for your capital. These professionals are hired for the same purpose and have the insight to analyze and interpret financial data to judiciously invest your money in the right place.
However, if you are good at research and are inclined towards stock market investing, you can start off with small stock market investments in companies that have potential. To understand these, let’s take some differences into consideration.
Mutual Funds vs Stocks – Pros and Cons
Investment cost: When you invest in mutual funds, you have to pay different charges such as an expense ratio, load fee (entry load, exit load), etc. For the top mutual funds in the market, the expense ratio can be as high as 2.5-3%.
On the other hand, if you invest in the stock market, you need to open your brokerage account (which also includes opening account charges), on top of that, you have to pay some annual maintenance charges too. Furthermore, there are also different costs while investing in stocks such as brokerage, STT, stamp duty, etc. However, when you mug up some statistics about mutual funds vs stocks returns, you will learn more about the cost and the return on investment.
Investment tracking: While investing in mutual funds, you have the benefit of a fund manager who has extensive expertise and experience in the field. Whether it is picking the stocks or monitoring them and making allocations, you do not have to worry about it. This service is not available in the case of stock investments. You are on your own for picking and tracking your investment.
Diversification: A well-diversified portfolio is the one that should entail at least 25 to 30 stocks, but that would be a difficult task for a beginner investor. However, mutual funds can help investors with low investment capital also to get a diversified portfolio. You can invest in multiple stocks without having to invest a considerable corpus by buying units of a fund.
Tax saving: If you invest in ELSS (Equity linked saving scheme) which comes under mutual funds, you can avail of a tax deduction up to Rs 1.5 lakhs in a year under Section 80C of the Income Tax Act. If you sell your stock holdings before one year from the date of purchase, it will be then subject to short-term capital gains tax at the rate of 15%.
On the other hand, there is no tax levied on capital gains of the stocks that are sold by the fund. This can be a great benefit for you. The tax which is saved can be invested further, thus paving the way for further wealth generation through investment.
When it comes to the investment horizon, mutual funds need at least 5-7 years to generate substantial returns as these have a long-term growth curve. On the other hand, you can get quick and great returns if you invest in the right stocks and sell them at the right time.
The above-given points clear the basics of mutual funds vs share market; Once you have understood these common points that should be kept in mind, you will be clear your goal. All in all, stocks are a bit riskier than mutual funds but provide you with high returns most of the time, provided you have done your research well. However, it is advisable to consult your financial advisor or an expert before making any move in the market.