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Mutual Funds vs Stock Investment – Which is Better Option?

Many individuals wonder whether of the two investing options, mutual funds or stocks, is the better. To receive the highest returns on your investment, let’s look at the differences between mutual funds and stocks.

There are several basic distinctions between mutual funds and equities when it comes to investing.

Both instruments differ in investing approach and management, starting with the Return on Investment and risk. As a knowledgeable investor, you should be aware of these distinctions before making an investment decision.

This article explains the distinctions between stocks and mutual funds, as well as why investing in mutual funds is preferable than investing in stocks.

Difference Between Mutual Funds and Stocks Investment

When you purchase a share, you get legal ownership of the firm, as well as voting rights and the right to a portion of the company’s income. You can also attend the company’s Annual General Meetings and write to them.

Buying stock, on the other hand, is a direct investment in the stock market, with earnings generated in one of two ways:

  1. Dividends received
  2. Sale of stocks

When you invest in mutual funds, you are purchasing a portion of a pooled fund that has been assembled by a group of investors. The amount of mutual fund units you buy during the investment is your share. The mutual fund house has exclusive rights and benefits for you.

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You may invest in equity as an asset class in stocks, but you can invest in one or more asset classes or sub-asset classes in mutual funds since mutual fund schemes can contain a diverse portfolio.

Investing in mutual funds is a kind of indirect stock market involvement.

You can only profit from mutual funds by selling units, and dividends paid on the scheme’s shares may or may not be immediately available to you.

If you choose the “Dividend” option, the fund company will distribute the dividend to you. If you choose the “Growth” option, your dividends will be re-invested in the fund to create returns.

Mutual Funds vs Stock Investment

If you choose the “Dividend” option, the fund company will distribute the dividend to you. If you choose the “Growth” option, your dividends will be re-invested in the fund to create returns.

Now that you know the difference between mutual funds and stock market investing, you can make an informed decision. Let’s examine the characteristics of stocks and mutual funds to see which is the better option for you.

Mutual Funds Vs Stocks Investment

  1. Risk and Return

Buying individual stocks is a high-risk, high-reward proposition. There’s also the possibility that you’ll wind up with a loss.

Equity mutual fund schemes have a diverse portfolio, despite the fact that they have a higher risk owing to the asset class they invest in. Negative returns on a particular stock might be offset by positive returns on another stock.

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As a result, investing in mutual funds allows you to avoid negative return possibilities.

  1. Management

When making an equity investment, you rely completely on your research, expertise, and abilities, which may or may not be enough in all market conditions. You may be restricted by tools and services that may assist you in effectively managing your stock investment.

All of these disadvantages do not apply to mutual fund acquisitions. Mutual fund firms have fund managers who are seasoned financial specialists who look after your money. The fund house also has access to all of the necessary tools and resources for managing the money.

  1. Diversification

A well-diversified portfolio should contain at least 15 to 20 equities, but for an individual investor, that may be a significant investment.

Investors with small amounts of money, as little as INR 1000, can have access to a diverse portfolio through mutual funds. Purchasing units in a mutual fund allows you to invest in several stocks without having to put up a large sum of money.

  1. Cost

When acquiring shares, mutual funds benefit from economies of scale, resulting in cheaper transaction costs and, as a result, lower brokerage fees than individual investors.

You can also avoid paying yearly maintenance fees on Demat accounts because mutual funds do not require them.

  1. Investment Style

When you invest in stocks directly, you must do your own research and enter and exit the market depending on your findings. You must also spend time to manage your investments.

It is up to you to decide whether to purchase or sell. As a result, when you invest in stocks, you have complete control over your investment decision, making you an active investor seeking to maximize your profits.

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In the case of mutual funds, you do not have the option to pick or trade stocks, or any other assets, throughout the investment term.

Mutual Funds vs Stock Investment

You become a passive investor since the fund manager handles all of the investing, tracking, and management on your behalf. If you’re new to stock investing and don’t want to spend a lot of time analyzing stocks, mutual funds are the way to go.

  1. Investing / Trading time

Stocks can be purchased at any time throughout the exchange’s trading hours, which run from 9:15 a.m. to 3:30 p.m., and transactions are completed at the current price.

Mutual funds can only be bought or sold once per day, at the end of the day, when the NAV has been settled.

  1. Tax Benefits

ELSS mutual funds offer you the option to save taxes and can help you save up to INR 1.5 Lakhs under Section 80C of the Income Tax Act, 1961 by investing in tax saving mutual funds,

There is no such option to save tax while investing in stocks.

Why You Should Choose Mutual Funds Over Individual Stocks?

  1. Professional Management

When you invest in a mutual fund, you don’t have to worry about evaluating, selecting, timing, tracking, or managing the purchase. A skilled and professional fund manager oversees everything.

  1. No Taxes on Short Term Gains

If you sell a stock before one year has passed since you bought it, you will be subject to 15 percent Short Term Capital Gains (STCG) taxes.

Mutual fund firms, on the other hand, are exempt from paying STCG on stock traded. The gains are either dispersed or reinvested in the mutual fund, which might benefit you as a unit holder in the long run.

Mutual Funds vs Stock Investment

To avoid paying the STCG tax, you must keep your mutual fund investment for at least one year.

  1. Diversification

To build a diverse equity portfolio, you’ll need to invest in at least 15 to 20 equities, which entails a significant initial commitment.

Investing in a mutual fund is more advantageous in this case. You obtain a varied portfolio across assets with an investment of INR 1000, which means that if you invest in Equity Mutual Funds, you get a diversified equity portfolio.

  1. Lower Cost

When it comes to purchasing and selling, mutual funds rely on economies of scale. They even bargain with brokers to acquire better prices, all of which results in cheaper expenses that are passed on to unitholders indirectly.

This is not the case while purchasing stock. Furthermore, when you invest in mutual funds, you do not need to keep a Demat account.

Conclusion

We hope you now have a better understanding of the differences between mutual funds and stocks and which is the superior investing option. If you want to profit from the inflation-beating gains given by stocks while avoiding many of the pitfalls of direct equity investment but are limited by time and knowledge, mutual funds are the best method to do so.

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