Choosing an investment avenue is like choosing a strategic path for your financial journey. Some prefer to take a steady and safe road, while others are excited by the thrill of fast-paced earnings. It often gives rise to a constant dilemma–mutual funds vs. stocks, what’s better? And since the last budget, as the equity mutual funds have offered up to 39% returns, the question has become a more common one among investors.
Due to the growing popularity of stocks and mutual funds, investors are drawn to both but are often confused when it comes to making the final investment decision. But worry not. This blog post is here to help you understand the basics of both and provide you with the right insights into crafting an investment strategy. Read along to understand what stocks and mutual funds are, their differences, and more.
What are Stocks: Understanding the Basics
Stocks are also known as ‘equity’ which represent the investor’s ownership in a particular company or corporation. Thus, investors who have stocks in a particular company enjoy partial ownership of that company. There are two types of stocks: common and preferred.
Common stockholders may get dividends. However, they enjoy voting rights in the company’s decision-making process. Meanwhile, preferred stockholders receive fixed dividends but have limited voting rights.
What are Mutual Funds: Understanding the Meaning
Mutual Funds are investment tools that pool money from a group of investors and invest it across various instruments, including stocks, bonds, fixed-income instruments, commodities like gold, etc. It helps in the diversification of risks and the achievement of financial goals with ease.
Here, the investors are the owners of only the ‘units’ allotted to them under the mutual fund. However, they do not have ownership of other stocks, bonds, or underlying assets the fund invests in.
Explore the Major Differences between Mutual Funds and Stock
Before you draw any conclusion about the stocks vs. mutual funds debate, try to understand the major differences between them through the following table:
| Parameters | Stocks | Mutual Funds |
| Management | Investors have to manage their own stock portfolio as they are the ones who invest directly in shares. | Your mutual fund portfolio is managed professionally by expert fund managers. |
| Suitability | Experienced investors who have sound financial and market knowledge have a chance of performing better in stocks. | As professional fund managers manage the mutual fund portfolio, both new and seasoned investors can benefit from it. |
| Diversification | Diversification is not possible because when you buy shares of a particular company, you are only investing in that company. | Via mutual funds, your investments are diversified across multiple stocks and sectors. |
| Control | As you invest in the stocks directly, you have complete control of your investment portfolio. | As fund managers manage the investment portfolio, investors do not have any control over the underlying assets in the portfolio. |
| Risk | Direct stock investments are exposed to higher risks compared to mutual funds. | Mutual funds are exposed to lower risk–all thanks to investment diversification. |
| Return Potential | Stocks often offer higher returns. | Depending on the mutual fund scheme, investors can earn high to moderate returns. |
| Tax Benefits | Stocks do not offer any tax benefits; investors have to pay tax on the gains earned from their sale. | There are certain mutual fund schemes that offer income tax benefits to the investors. |
| Investment Horizon | Investments in stocks are usually for both long-term and short-term. | Mutual fund portfolios usually provide better returns when kept invested in the long-run. |
| Systematic Investment Plan | Stocks do not offer investors the features of a systematic investment plan. | Mutual funds extend the feature of a systematic investment plan. |
Uncover the Pros and Cons of Investment in Mutual Funds
As you now know the basics of mutual funds, understanding their pros and cons will help you in making the final decision:
Pros
- Accessibility
A mutual fund scheme allows investors to start investing with smaller amounts, eliminating the need for extensive capital. Thus, even small investors can take part in diversified mutual fund schemes.
- Convenience
Mutual fund schemes offer investors systematic investment plans (SIP) and systematic withdrawal plans (SWP). It enables investors to conveniently automate their investment and redemption process.
- Tax Benefits
Certain mutual fund categories, like the ELSS, offer investors a tax deduction of up to ₹1.5 lakhs per annum for investment under section 80C of the Income Tax Act.
Cons
- Fees and Other Expenses
A mutual fund charges investors with varied expenses, like fund management expenses, administrative costs, sales, charges, etc. It can erode your returns over time.
- Over Diversification
Although diversification is a crucial advantage in mutual fund schemes, over-diversification can lead to diluted returns. It can also limit the potential for remarkable gains.
Discover the Pros and Cons of Investing in Stocks
Let us now have a look at the pros and cons of investing in the stock market:
Pros
- Higher Returns
Through stocks, investors can earn higher returns over the long term, especially through emerging sectors and growth-oriented companies.
- Hedge Against Inflation
Historically, stocks have a hedge against inflation. Wondering how? Companies can adjust the prices of their goods and services in proportion to their rising costs, which may boost their revenues and profits.
Cons
- Market Volatility
Stocks are subject to market volatility. It can lead to short-term losses and huge fluctuations in your investment portfolio value.
- Brokerage
Every time you trade in stocks–either buying or selling, you must pay brokerage to the share broker. It reduces the returns that you earn from the market.
Final Thoughts
As there are pros and cons of investing in both stocks and mutual fund schemes, one thing is clear–there is no one right choice. Your final decision about investing in either of the two must be based on sound market analysis, individual financial goals, and risk appetite. If you have great market knowledge and higher risk tolerance, you can consider investing in shares. Meanwhile, if you have a low-risk appetite and prefer professional guidance, mutual funds are the ideal investment avenue. Alternatively, you can diversify your portfolio and invest partially in both stocks and mutual fund schemes.
