Morgan Stanley’s research states that India is positioned to drive one-fifth of the global growth over the next decade. The market capitalisation is likely to grow by 11% annually to $10 trillion. As an investor, mutual funds and stock investments are among the most popular choices to grow your savings. However, it is recommended that individuals must analyse all the features associated with their investment vehicle before making an investment decision. This article aims to analyse the key differences between stocks and mutual funds and provide insight into which is a better investment avenue.
Mutual Funds vs Stock Investment
Stocks and mutual funds differ extensively depending on the investing style and the risk and return factors. When you buy a stock, you own a stake in the company and can generate income through (i) dividends and (ii) the sale of stocks. Mutual funds help you gain a share in the pooled fund collected by various investors. Mutual funds allow you to select between different plans in case of dividend allotment. The “growth plan” reinvests the dividends into the fund to generate returns. On the other hand, a “dividend plan” is used more commonly by risk-averse investors to generate a stable income stream. While mutual funds may offer lesser transaction costs, many brokerage firms offer a free Demat account for first-time investors. Let us look at the critical differences between mutual funds and stock investments.
|You rely on your research, knowledge, and expertise for stock screening. Your study may only consider some market scenarios. Additionally, you may need more tools and resources to conduct in-depth research before selecting stocks for your Demat account.
|Experts manage mutual funds with access to advanced tools and resources. Mutual funds will be your best option if you are a new investor with time constraints or lesser knowledge of the stock markets.
|Risk vs Return
|Investing in individual stocks carries a greater risk. You may even witness negative returns.
|Mutual funds invest in diversified portfolios, thereby minimising the risk. Higher returns by other stocks can compensate for negative returns generated by a stock.
|A well-diversified portfolio comprises at least fifteen to twenty stocks, which requires a significant investment.
|With mutual funds, investors can access well-diversified portfolios without needing significant investment.
|You must pay your Demat account’s annual maintenance and additional charges to your broker.
|Mutual funds attract lesser transaction costs. Moreover, you can also save on your Demat account annual maintenance charges while investing in mutual funds.
|You can buy or sell stocks anytime during market hours, i.e. 9:30 a.m. to 3:30 p.m IST.
|Mutual funds can be bought or sold only once after the NAV is finalised at the end of the day.
|Stock investments do not offer tax benefits
|ELSS Mutual funds help in providing tax benefits worth up to Rs. 1.5 Lakh per annum.
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Mutual Funds vs Stock Investments – Which is a better investment avenue?
Selecting an investing option largely depends on the investor’s risk-appetite and requirements. However, mutual funds provide more substantial benefits for passive investors, such as
- Professional Management – Mutual funds save you from extensive research in individual stock screening.
- No Taxes on short-term gains – Individuals selling their stocks before one year of completing the purchase must pay 15% taxes in the form of short-term capital gains. This criterion does not apply to mutual funds.
- Diversification – Mutual funds offer well-diversified portfolios that help in generating higher returns while lowering the risk.
- Lower cost – Mutual funds get discounted rates after negotiating with brokers, leading to lower costs. These benefits are indirectly passed on to the unitholders.
However, stock investment is the most suitable option if you want to select and manage your portfolio actively. Mutual fund houses take control of portfolio management. They do not allow you to pick or transact your preferred stocks or choose their investment horizon.
Stocks and Mutual funds both are excellent sources of investment. However, selecting the right investment avenue primarily depends on the investor. If you seek to manage your investment portfolios actively, buying individual stocks would be best for you. However, if you are a passive investor, purchasing mutual funds can benefit you from diversified portfolios to low costs.