Should You Invest in Stocks or Mutual Funds?
Investors, in general, have so many ‘this’ or ‘that’ questions that they would have to answer. This is because of the wide range of investment options out there. One among these questions is – Should you invest in stocks or mutual funds? If you are wondering the same, then this page will help you answer this question.
Read this blog to understand the basics of stocks and mutual funds.
What are Stocks?
In simple terms, shares are a company’s unit of equity holdings. Shareholders are the persons who own the shares and own a little portion of the company. Shares can be purchased directly via trading applications or brokers.
People nowadays are eager to experiment with numerous investment strategies in order to enhance their earnings. Shares are an excellent investment opportunity. Many people want to start their own businesses but, for various reasons, are unable to do so. Shares allow them to participate in the enterprises of others while representing their interests/views. The Securities and Exchange Board regulates the Indian stock market under the SEBI Act 1992.
What is a Mutual Fund?
Mutual funds are an investment outlet in which Fund Houses manage the investor’s money by pooling the money of like-minded persons with the same investment goal and investing the collected amount in various investment avenues such as equities and bonds. A professional Fund Manager oversees the money of multiple investors in this case.
The fund manager has extensive market understanding and only invests in diverse assets after doing thorough research. And for this service provided by fund managers with competence in this area, the fund house charges a modest fee, which is a small percentage of a person’s entire investment, known as an expense ratio or management fee, which is often between 1-3%.
Now, let’s look at stocks vs. mutual funds and what you should be investing in.
Choosing Between Stocks or Mutual Funds
a) Costs: Due to economies of scale, mutual funds incur reduced transaction costs when purchasing shares and, as a result, pay cheaper brokerages than individual investors. You can also avoid paying annual maintenance fees on Demat accounts if you are investing in mutual funds.
b) Diversification: A well-diversified portfolio should include at least 15 to 20 stocks, which can be a significant investment for an individual investor. Mutual funds allow investors with as little as INR 1000 to gain access to a diverse portfolio. Purchasing fund units allows you to invest in several stocks without having to pay a large sum of money.
c) Returns and Risks: Individual stock purchases are a high-risk/high-reward proposition. There is also the possibility of receiving negative returns. Even though equity mutual fund schemes are riskier due to the asset class in which they invest, they have a well-diversified portfolio. Any negative returns on a particular stock can be offset by positive returns on another stock. Thus, by investing in mutual funds, you prevent negative return scenarios.
d) Management: When making an equity investment, you rely completely on your research, expertise, and skills, which may or may not be adequate in all market conditions. You may be limited in your access to tools and services that could assist you in properly managing your equity investment. All of these disadvantages do not apply to mutual fund acquisitions. Mutual fund institutions employ qualified financial professionals to manage your money as fund managers. Furthermore, the fund house has access to all of the tools and resources needed to administer the funds.
e) Investment: When investing in stocks directly, you must conduct your own research, depending on which you enter and exit the market and commit time to manage them. The decision to buy or sell is entirely yours. As a result, when you invest in stocks, you have complete control over the investment decision, making you an active investor looking to maximize your returns. In the case of mutual funds, you do not have the ability to choose or trade stocks, or any other assets, during the investment period. The fund manager does all of the investing, tracking, and management on your behalf, allowing you to be a passive investor. If you are new to stock investing and do not want to spend a lot of time analyzing stocks, mutual funds are the best alternative for you.
f) Taxes: By investing in tax-saving mutual funds, you can save up to INR 1.5 lakhs under Section 80C. There is no way to save taxes when investing in equities.
g) Timings: Stock can be purchased at any time during the exchange trading hours, which run from 9:15 a.m. to 3:30 p.m., and transactions take place at the current price. Mutual funds – on the other hand, can be purchased at any moment. The appropriate NAV, however, is determined at the time of purchase. If you buy the units before 3 p.m., the applicable NAV will be that day. All purchases made after 3 p.m. will have the applicable NAV of the next day.
Stocks or Mutual Funds
Now that we’ve evaluated Mutual Funds versus Stocks, we can answer the question, “Mutual Fund vs. Share Market- Which is Better?” Both of these investment opportunities are excellent and have distinct advantages. One provides independence, while the other provides professional advice. One provides company ownership, while the other provides diversity.
Mutual Fund vs. Stock Market is an intriguing debate issue that can potentially become endless. It all comes down to the investor and what they want.
As a result, there is no proper response to the above question. One must have a sufficient understanding of both investment opportunities before making a selection and investing intelligently.
Conclusion
Every investor is unique, as is their investment style. It is up to the investor to decide which features he wants to use and which investment path is best for him based on his investment goal, investment schedule, and risk tolerance.
