One of the habitually asked questions by an investor while making an investment is the difference between investing in stock and mutual funds. Both mutual funds and stocks are beneficial in their own way and it entirely depends on the investor to what type of gains he is looking forward to and what amount of risk is he willing to take. However, before investing your money, let’s understand what is mutual funds and stock first.
In this article
What is Mutual Funds:
Mutual funds are rapidly turning out to be an intellectual source of income for the entrepreneurs of the future as they are quite profitable and safe compared to stocks. A mutual fund is an investment which is made up of many funds collected from different investors to invest in securities like bonds, shares or assets. They are operated by managers who invest the capital and try to make capital gains and income for the investors who have provided the funds. Every shareholder participates in the profit or loss of the fund that is being invested. There are different types of securities in which the funds are invested and the performance is tracked as the change in the total market capital of the fund is calculated by totaling the performance of the principal investment.
A stock is a term which is referred to the ownership certificates of a company. It denotes ownership in the company and signifies a claim on a specific part of the earnings and assets of the company. There are usually two types of stock – preferred and common. For a person who is holding preferred stock holds no right to vote at meetings but has a higher claim on earnings and assets compared to common stock who do have the right to vote and get dividends but their earnings are less. When it comes to sharing dividends the preferred stockholders receive them first and then the common holders are transferred their dividend. Also if the company at any point is liquidated, the preferred stock holders get their shares first.
Difference Between Mutual Fund and Stocks
Stocks could be quite volatile. Their range of fluctuation sometimes goes to extremes and there are days when you could make a return of 25% but on other days it could get you say a 15% loss. The value of stocks changes many times in a day and the investors are always sitting on the edge acting fast to make profits.
Mutual funds are valued once at the end of the day and are much more stable compared to stock. Mutual funds are quite diverse and there are different types of stock from various market capitalization and sectors are involved. Because of this diversification, the overall change in the value is less volatile.
If one is looking for short-term gains, then investing in stock could get to good results provided there is a certain amount of research that goes in. However, there are many who have lost when they have invested in stocks – this could be a result of poor research about the market.
Mutual funds usually give good profitable and the returns are fairly good, yet the high amount which can be earned from stock may not be possible here. Stocks at times give unbelievable returns. As we discussed in the above point the fund is invested in different stocks so the returns are divided. So, while investing, if you are looking for short-term gains mutual funds are not to be invested for a short period of time.
Stock dealing usually calls for buying and selling and if they are sold within one year there is a short-term capital gains tax that one would have to pay.
Mutual funds are in fact all about saving taxes. There are no capital gains that happen in mutual funds which is quite beneficial for an investor however, one should be holding the equity fund for at-least a year so that they don’t have to pay short-term capital gain investment tax.
For those who are investing in stocks have to keep a close eye on the market themselves. Even if someone is buying stocks for a longer period, they need to check on it at-least every quarter. One would have to also be updated with news and the developments in every sector.
Mutual funds needn’t be monitored by an individual. Once the funds have been invested a manager will take care of the fund management through the fluctuations of the market. The manager repetitively adds and removes stocks from portfolio to ensure that the funds are balanced.
Mutual funds are known for their SIP – Systematic Investment Plan, which is nothing but investing monthly. For those who are unable to invest a huge amount in one go mutual funds are perfect. There is no knowledge needed on how equity markets work, however, one should have an understanding of what the returns would be.
Stocks don’t work with SIPs. Companies will offer you the facility but the theory doesn’t go well. Since there is no diversification of funds SIP in just one stock makes no sense at all as all the risk lies in one stock. A stock can undergo a bad period for years but a bad stock in a mutual fund can be taken out.
Restriction of Assets:
Stocks are limited. What you can pick up is a large-cap stock, mid-cap stock, and small-cap stock. Irrespective of which one you pick it is ultimately going to be equity asset class. For those who are wondering what large, mid and small-cap stocks are – a large-cap is used for a company that has a market capitalization of $10 billion and more, a mid cap company would have a market capitalization between $2 billion and $10 billion while small cap would be companies would have lesser than $2 billion market capitalization. Also, there are mega caps and companies such huge would have a market capitalization of $5 billion. Small cap stock happens to be the riskiest ones while a large-cap stock is a more bit stable and can take the gush of recessions. A mid-cap stock usually is considered as ones with a lot of growth potential.
For someone who is looking forward to investing in the long term and wants fixed returns mutual funds is what they should be looking forward to. However, for those who are willing to take the risk should invest in stock – you never know what luck and the market have in store for you!