Select Your Location
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.
Table of Contents
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.
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.
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.
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.
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.
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) 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).
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.
The following table illustrates the fundamental differences between stock market and mutual fund investing.
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
Akansha is a Delhi-based lawyer who is actively involved in publishing articles on a plethora of aspects of Indian and International laws. She holds Master in law (LL.M) focused on Business Laws from Amity University, Noida. Having expertise in the same, she has authored several publications on legal topics related to corporate, M&A and commercial laws.
Black money has been the subject of heated political debate in India for a long time. Successiv...
The Apex Court pronounced a judgement in the case titled Tata Motors Vs The Brihan Mumbai Elect...
Since economies are moving towards digitalisation and making it feasible to conduct transaction...
The Alternative Investment Funds (AIFs) Pro-rata and Pari-Passu Rights Proposal Consultation Pa...
The Financial Action Task Force, i.e. FATF (the Force), is the global money laundering and terr...
Advance tax refers to the payment of the tax liability before the end of the relevant financia...
On 11.12.15, the Hon’ble Delhi High Court (HC) pronounced a landmark judgement in the case ti...
Money laundering can be defined as the process of illegal concealment of the origin of money ob...
Every assessee in India is obligated to file an income tax return and make the timely payment o...
In the recent past, India has seen burgeoning demand for internet and smartphones. The rapid ri...
Are you human?: 6 + 5 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
The SEBI through a notification on 14th November, has amended the SEBI LODR Regulation 2015 by inserting two new re...
29 Nov, 2022
The authorities are well aware of the need of updating the laws and regulations to be in tune with the dynamic envi...
20 Nov, 2022
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!