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Difference between Stocks and Mutual Funds

Stocks and mutual funds (or shares) are two of the most common financial investment vehicles. They are two completely different financial instruments that are sometimes misunderstood as the same.

Let’s look at these two distinct financial products to see which one is best for you.

Brief introduction of Stocks and Mutual Funds

Stocks are a representation of a company’s complete share capital that are exchanged on the stockmarket. This implies that as a shareholder, you own a piece of the firm. Investing in the stock market entails purchasing the company’s stock directly. In this case, you are investing in firms listed on the stock exchange with the intention of profiting when the stock price rises.

When a company goes public for the purpose of raising cash for its operations, it can do it in two ways:-

Mutual funds, on the contrary, are a mixture of different securities like money market instruments (participatory notes, treasury bills, and so on), debt instruments (government and corporate bonds, and so on), equities (stock), and so on. It is a type of investment scheme that combines the funds of several participants and invests it in these assets. In other words, a mutual fund is a type of collective investment that combines the money of a large number of participants to acquire a variety of assets such as equities, FDs, bonds, and so on.

Mutual fund investments are therefore a type of investment in various financial instruments where the research is done by professionals and handled by an Asset Management Company (AMC) or a fund house. This service is not free and is subject to yearly management fees levied by the mutual fund company. Whenever you buy a mutual fund share, you get a partial ownership in all of the investments in that fund. As a result, by investing in a mutual fund, the investor shares the fund’s portfolio’s gains and losses. When someone invest in stocks or stocks, on the other hand, one is directly handling the purchasing and selling of the financial asset. As a result, it is a more active type of investment than mutual funds, which are passive. On the other hand, Mutual funds managed by a fund manager and are actively managed.

In layman’s terms, stocks are an element of a company, whereas mutual funds are a pooled investment vehicle that invests in stocks, among other asset classes.

Stocks are considerably riskier than equity mutual funds. The diversified equities mutual fund expands your investment across sectors and industries, reducing volatility. Before investing your money, you must perform comprehensive study to select the best stocks. Mutual funds, on the other hand, are less riskier than individual equities owing to their diversification. Diversifying your investments is an important risk-management strategy for investors. However, Limiting your risk, may restrict the profits you’ll get from your investment. Before we get into determining the best investing option for you, let’s first define the difference between mutual funds and stocks.

Meaning of Stocks

Stocks are a unit of proportionate ownership in a company’s capital. It also gives stockholders an equal part of the company’s profit and loss.

Several variables, for example, can impact the price of equities on the market. For instance, when a firm does well and shows signs of progress, its stock price rises.

A corporation often offers stock to the public to generate funds and increase the company’s market value. It enables the investors to own a piece of a company’s equity and profit from a share of the company’s profits.

Individuals typically are benefited from stock investments in two ways: capital gains and dividends. They have the option of investing in equities for both the long and short term.

Investors must use their Demat account to invest directly in a company’s shares, allowing them to diversify their portfolio. This is a significant distinction between stocks and mutual funds.

Benefits of Investing in Stocks

In the digital era, stock trading has gotten more easier. You just need to create a Demat Account and a Trading Account, as well as fulfil KYC procedures, before you can start trading shares. You should keep in mind that when you buy stocks, they are instantly credited to your Demat Account, whereas your Trading Account serves as a connection between your Demat Account and your bank account.

Meaning of Mutual Funds

Mutual funds, in general, are a type of collective investing option. It pools investment from several investors and invests it in profit-generating firms’ bonds, securities, stocks, gold, FDs, and other investments.

Investors who invest in mutual funds share in the gains and losses generated by the portfolio of their fund. Individuals can invest in stocks of firms that are listed on stock markets. In addition, if investors stay involved for a long period, most mutual funds may help them earn better returns and enable capital appreciation.

The fact that mutual funds, unlike stocks, are managed by fund managers, is a significant distinction between the two.

Aside from expert management, this investment vehicle offers the following advantages:- liquidity, diversification, affordability, and tax savings.

Furthermore, the fact that mutual funds are governed by SEBI makes their operations clear and trustworthy.

Benefits of investing in Mutual Funds

The SIPs, which allow you to invest based on your income and give the benefit of rupee cost averaging, are the main feature of Mutual Funds.

Key differences between Stocks and Mutual Funds

Based on eleven essential variables, these are the key distinctions between stocks and mutual funds investing–

1. Cost of investing

When you invest in mutual funds, you must pay various fees such as an expense ratio, a load fee (entry load, exit load), and so on. The fee ratio for the best mutual funds might be as high as 2.5-3%.

On the contrary,  if you want to invest in the stock market, you must first create a brokerage account (which includes starting account fees) and then pay some yearly maintenance fees. Furthermore, there are many fees associated with trading stocks, such as brokerage, STT, stamp duty, and so on.

However, when you compare the fees associated with stock versus mutual fund investment, you will see that the costs associated with stock investing are still cheaper. This is due to the numerous expenditures associated with operating a mutual fund, such as the management fee, the compensation of the managers/employees, administrative charges, operational charges, and so on. However, when it comes to investing in stocks, the most significant cost is just the brokerage.

2. Volatility in investment

When compared to mutual fund investment, direct stock investing is more volatile. This is because of the fact that when you invest in stocks, you typically buy 10-15 stocks.

Whereas in mutual funds, a diversified portfolio that invests in various securities such as stocks, bonds, fixed deposits, and so on. Even mutual funds that invest in stocks invest in at least 50-100 stocks. The volatility of mutual funds is far lower than that of equities due to their extensive diversification.

3. Return potential

Investing in the stock market offers a very high return potential. Most of the world’s and India’s most successful investors, such as Warren Buffett, RK Damani, Rakesh Jhunjhunwala, and others, have created their fortunes by investing directly in the stock market.

This is, however, just one side of the picture.

The truth is that the vast majority of investors lose money in the stock market. While investing in stocks has a high return potential, it also comes with a larger risk.

On the contrary, most of the top-ranked mutual funds have consistently provided strong returns to their investors. Although the profits are not as high as those achieved by many great stock investors, this return is sufficient to establish a substantial amount of money for a secure future for the typical individual.

4. Tax saving

Under section 80c of the Income Tax Act, you can get a tax deduction of up to Rs 1.5 lakhs if you invest in ELSS (Equity linked saving plan)^[1] through mutual funds.

Another advantage of investing in a mutual fund is that you will not be taxed if the fund sells any stock from its portfolio while you are a shareholder.

On the contrary, when you sell shares while investing directly in the stock market, you will have to pay a tax, regardless of the circumstances. When it comes to investing in the stock market, there are no tax advantages. Short-term capital gains are subject to a 15% tax while long-term capital gains are subject to a 10% tax (beyond a profit of Rs 1 lakh).

5. Monitoring

Investing in the stock market necessitates constant attention. This is due to the fact that stock market trading is a very personal endeavour. No one will do this for you here, therefore you must keep track of your stocks individually. Furthermore, due to the high volatility of the stock market, the monitoring frequency should be increased at least once a quarter or twice a year.

Mutual funds, on the other hand, have fund managers who look after your investments and make buy/sell decisions on your behalf. As a result, you don’t need to examine your mutual fund as regularly when you invest in it.

6. SIP Investment

Mutual funds investment gives you the option of following a systematic investment strategy.

Investments made on a regular basis are referred to as periodic investments. For instance, the investor might invest a predetermined sum, such as Rs 1,000 or 5,000, every month (or every quarter or six months), to acquire certain units of the fund. SIP aids in the automation of investing and adds discipline to the investment plan.

On the other hand, there is no SIP option for stock market investment.

7. Asset class restriction

Stocks of the company are the only assets that may be spent while investing in the stock market.

A mutual fund, on the other hand, allows you to invest in a diversified portfolio. A number of asset classifications are available. As an example, debt mutual funds, equity-based mutual funds, gold funds, hybrid funds, etc. are all available.

8. The time required for investing

Direct stock investment takes a lot more time than investing in a mutual fund. This is due to the fact that a mutual fund is managed by a fund manager.

The only requirement is that you do your analysis before making a direct investment in the stock market. This involves a lot of research, time, and effort on your part.

9. Ease of Investment

You must create a brokerage account with the aid of a stockbroker in order to invest in the stock market. Here, you must establish a Demat and trading account, which can take up to a week to complete.

On the contrary, you may begin investing in a mutual fund in less as 10 minutes. To begin investing in mutual funds, you do not need a brokerage account. On the Internet, there are a number of free sites (such as Groww or FundsIndia) where you can register in a matter of minutes and begin investing in mutual funds.

10. Time horizon of investment

In general, mutual funds have a long-term investing time horizon of 5 to 7 years. You’re not trading funds here; instead, you’re investing for the long term to profit from capital gain or regular income from dividend funds.

Stocks, on the other hand, can be long-term or short-term investments. You may even hold the stock for a week and still make a profit.

11. Control on investment

You will have a lot of power and influence if you invest directly in the stock market. You may make important judgments here, such as when to purchase, when to sell, what to buy, what to sell, and so on.

On the contrary, you don’t have much influence over your assets when you invest in a mutual fund. Your fund manager is the one who decides which stocks to purchase, when to buy, when to sell, and so on. Finding and investing in a reputable mutual fund gives you the most control. However, once you’ve spent your money, the fund management will take care of everything.

Furthermore, mutual fund performance is determined by the fund manager’s efficiency.  You can expect large returns if the fund manager is efficient. If the fund manager isn’t very good, you could end up with lower returns. There’s also the potential that the fund manager will leave or join another fund house.

Overall, you must rely on the fund management in this situation. However, while investing in the stock market, you are not reliant on anybody and can make your own decisions about which stocks to purchase and sell.

Stocks vs. Mutual Funds

The following table illustrates the fundamental differences between stock market and mutual fund investing.

S. No.	Parameters	Stocks	Mutual Funds
1.	Definition	They indicate a company’s ownership.	Investors are comparable to shareholders in that they own and benefit from funds or equities.
2.	Denomination	The value of different stocks might be the same or equal.	It is, in essence, a pool of money gathered from investors.
3.	Numeric Value	Stocks have a defined monetary worth.	Net asset values (NAVs) are used to describe the worth of mutual funds.
4.	Original Issuance	The potential of an original issuance exists at all times.	There isn’t a chance like that with mutual funds.
5.	Risk Level	They come with a higher level of risk.	The risk factor is minimal in comparison.
6.	Suitability	Seasoned investors who are well-versed in the stock market have a higher chance of outperforming the market.	These funds are managed by professionals, and both novice and experienced investors can benefit from them.
7.	Diversification	Diversification is feasible only if the stocks allow for it.	Mutual funds provide additional diversification options.
8.	Return potential	They provide a greater rate of return.	It delivers high to moderate returns depending on the plan.
9.	Market knowledge	To properly manage stocks, investors must be well-versed in market forces.	Market expertise is also beneficial in the case of mutual funds.
10.	Trading cost	The trade cost is quite expensive.	The expenditure for funds is recouped by investors during the investing process.
11.	Convenience	Individuals can invest in shares by opening a Demat and Trading Account. The process is time-consuming and inconvenient.	Investing in mutual funds is a lot easier and may be done in a matter of minutes.
12.	Tax benefits	When selling their stocks, investors must pay a tax.	Several mutual fund schemes provide tax advantages to investors.
13.	Restrictions	It is subject to asset-class limitations.	Investors can diversify their holdings by putting their money in a diverse portfolio.
14.	Investment horizon	Stock investments can be made for the long or short term.	Most mutual funds outperform when held for a lengthy period of time.
15.	Systematic plan	Stocks do not add to the functionality of systematic investment strategies.	Mutual funds have the systematic investment plan feature.
16.	Control over investment	Stockholders have a greater degree of influence over their investment.	Investors in mutual funds have less control over their investments.

Conclusion

Given the distinction between stocks and mutual funds, it is clear that both equities and mutual fund investments are profitable. However, investors could invest in any of the two, based on their financial capacity.

Before investing, people should consider variables such as their income, risk tolerance, market knowledge, desired investment horizon, and financial goals. Based on this, customers may choose between a mutual fund and a stock market instrument that is more profitable. There is no such thing as a risk-free investment. When you invest in the market or even the safest fund, there will always be some risk. Investing in a mutual fund, on the other hand, is less risky than investing in the stock market. However, mutual fund returns are somewhat lower than those of the stock market.

Read our article:Mutual Funds – Different types of Mutual Funds in India