How is investing in stocks different from investing in mutual funds?
This is one question a lot of us ask.
If you decide to invest in equity that would be with the aim of churning out higher returns over a long term. This could either be via direct investment in stocks or mutual funds (MF).
Stocks need a detailed research on the companies you wish to invest in. They also need a thorough monitoring of
the market fluctuations.
This is because you are the fund manager here!
Hence it is your call – whether to buy or sell the stocks you own, based on how the market performs.
Equity mutual funds give you the benefit of convenience and aggregation. A fund manager chooses the portfolio of your mutual fund based on thorough research of the market.
In this article, we will see how your choice of investment affects you.
Perhaps the dilemma for a novice investor starts here.
Practically speaking, as compared to equity, mutual fund returns are regular, carry lower risk and offer benefits of compounding.
Which means the longer you stay invested in the fund, the more you earn. Also in the case of a diversified portfolio, the returns don’t fluctuate as much.
In comparison, since direct equity is invested in individual stocks, your returns can see a lot of surges and declines within short spans.
In mutual funds, the fund manager ensures investment in different sectors and is tracking the market all the time.
Whereas, direct stocks come with higher risks.
To diversify here would mean to invest in many different industries with a considerable amount of invested capital.
Yes, for investors who have the appetite and know the market, the high returns are definitely a reward. However, they come with a considerable amount of risk.
Both direct equity and mutual funds are based on the same company stocks being traded in the stock market. But the effects of the market flip-flops, are different on both.
In mutual funds, an under-performing stock gets balanced by another well-performing stock.
Hence, the gains are not affected to a huge degree.
But, in direct stocks, if that one under-performing stock is where most of your money is invested, that would mean your returns will become very low.
Unless of course, you check your stocks very efficiently and such situations are foreseen, which is rare.
Mutual Funds can provide tax benefits to an investor under Section 80 C if invested in equity- linked saving schemes (ELSS). This is not something direct equity investment can boast of.
Also, the latter comes with a short-term capital tax; that has to be paid if the stocks are sold within 1 year.
But, there is no such liability with mutual funds.
Aggregation makes control and monitoring much simpler. That is the advantage of mutual funds. You are monitoring the fund and not the individual companies in the portfolio.
But, this would mean that you do not have a direct control over which stocks your money is invested in.
Which is a fair assumption, but that is the price you pay for convenience.
In stark contrast, stocks demand your attention day in and day out. That implies, if you have invested in 20 companies, you control and watch all the 20 companies every single day.
That’s extensive. Not to mention cumbersome!
Investment preferences are like taste buds: to each his/her own.
The food that appeals to one might not appeal to the other; likewise, for the choice of an investment vehicle. What is important is that you are marrying your long-term financial goals to the type of investment vehicle you are selecting.
Disclaimer: The views expressed in this post are that of the author and not those of Groww