Stocks (equity) is part ownership of a company. 

A mutual Funds, on the other hand, is an investment led by professional managers. These fund managers invest in various options like shares and bonds depending on the type of mutual fund.

A mutual fund comprises of a pool of money collected from various investors for the purpose of investing in diversified securities.

Therefore, when compared to in terms of risk, stocks happen to be far riskier than mutual funds.

Investing directly in equity for a beginner is quite a tough task.

The ultimate motive is to benefit from the superior returns of equity. But, in terms of what one does, the two routes are completely different.

Unless someone is an expert investor or is willing to put in the considerable amount of time and effort required to become one, it does not make sense to invest in equities directly.

Therefore, for beginners, the choice is quite straightforward and that is to invest through mutual funds.

Stocks vs Mutual Funds – Which Gives Better Returns?

To compare the returns of these two categories, we have selected the returns generated by the top mutual funds in India as shown below:-

Fund Name 3-Year Return (%) 5-Year Return (%) 10-Year Return (%)
NIFTY 500 11.27 16.53 12.39
ICICI Prudential Bluechip Fund 10.97 17.06 15.88
SBI Magnum Multicap 12.62 21.12 12.77
HDFC Hybrid Equity Fund 5.59 15.65 11.77
SBI Bluechip Fund 9.72 18.26 13.82
Mirae Asset Emerging Bluechip Fund 16.86 30.29
Kotak Standard Multicap Fund 12.76 20.97

While looking at the returns generated by these funds, we can see that most of these funds have beaten the NIFTY Index for the given periods i.e. 3-year, 5-year, and 10-year returns.

However, calculating the returns of the top companies in NIFTY Index, we get the following:-

Stock Name 3-Year Return (%) 5-Year Return (%) 10-Year Return (%)
HDFC Bank Ltd. 25.87 25.76 26.26
Hindustan Unilever 22.13 22.88 22.88
Infosys 9.69 15.89 11.84
Maruti Suzuki 30.23 41.78 29.91
Sun Pharma (12.75) 2.20 15.43
Ultratech Cement 9.54 15.24 20.95

Drawing an inference from the above tables, we can note that most of the companies have provided a higher return as compared to equity mutual funds, but the risk associated with them is also higher given the exposure to just one stock.

Stocks vs Mutual Funds Which is More Risky?

Mutual funds have the advantage of reducing the risk by diversifying a portfolio by investing in a large number of stocks.

Stocks, on the other hand, are vulnerable to the market conditions and the performance of one stock can’t compensate for the other.

Therefore, the risk factor is very high in terms of stocks. (Beta and Standard deviation can be used to gauge the riskiness of a particular stock)

Stocks vs Mutual Funds – Cost of Investing

An investor has to pay a fee to mutual fund managers unlike in the case of stocks that an individual buys on his own. Active management of funds is an affair that does not come free of cost.

In case of stocks, apart from the brokerage fees and security transaction tax, individual investors also have to pay the charges for a demat account which is not needed in the case of mutual funds.

Overall, stocks are cheaper to invest in. Mutual funds charge a fee for the fund manager’s services. With stocks, the only charge is transaction charge.

Stocks vs Mutual Funds – Tax Implications

In the Budget 2018, the government announced long-term capital gains (LTCG) tax @ 10% on profits above 1 lac in equity shares and units of equity-oriented mutual funds.

We can understand the tax implications by looking table below:-

                                Stocks and Equity Oriented Mutual Funds (Individuals)
Long Term Capital Gain Tax (LTCG) 10% above a gain on Rs. 100,000
Short Term Capital Gain Tax (STCG) 15%

From the tables above, we can see that the tax implications in the case of both, equity mutual funds and stocks are the same.

Therefore, no one outweighs the other in case of tax gains.

But there is a mutual fund with tax benefits:

ELSS (Equity Linked Savings Schemes) are equity mutual fund schemes that invest in stocks, come with a mandatory lock-in period of three years and can be claimed as a deduction under Section 80C of the Income Tax Act, 1961.

Stocks vs Mutual Funds – Disciplined Investing

A major advantage of investing in equity mutual funds is disciplined achieved through SIP.

SIP is an automated form of investing in a mutual fund. In SIP, a fixed amount of money gets deducted from your account every month. This amount is invested in a mutual fund of your choice. Thus, you don’t have to invest yourself every month.

Doing so with stocks, on the other hand, is much tougher as every transaction needs to be carried out by the investor. 

Stocks vs Mutual Funds – Minimum Investment Size 

One of the major advantages of investing in mutual funds is that one can have a diversified portfolio by investing in small and flexible chunks (beginning with an amount as low as Rs. 100).

On the other hand, if one tries to build a diversified portfolio with stocks by buying them directly, they would need a relatively large sum of money to start.

Stocks vs Mutual Funds – Time and Effort Needed

When one invests directly in equities, he/she will need to invest a lot more time and research into a stock whereas in the case of mutual funds one can be a passive investor.

The fund manager is the one who invests his time to manage the portfolio.

These are the few parameters based on which an individual might pursue his goals of capital appreciation through either mutual funds.

One should also note that though equities as an asset class are risky as compared to equity mutual funds. A person having sound knowledge of finance and having experienced enough to withstand the nitty-gritty of the markets is sure to make money through investing directly in equities.

Happy investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.