Mutual funds vs stocks – which one is better for you?

Stock or Equity is a security that represents the ownership of a fraction of a corporation. The owner of the stock is entitled to a proportion of the corporation’s assets and profits equal to the number of stocks they own. “Shares” are known as units of stocks. Stock is a form of security that shows that the holder has proportionate ownership in the issuing company. Companies issue stocks to raise funds to operate their businesses. Stocks are basically divided under two heads common and preferred. Stocks are bought and sold mostly on stock exchanges, though there can be private sales as well and they are the foundation of nearly every portfolio. Investors park their surplus into stocks mainly for capital appreciation, dividends and also for voting rights which does allow them to be a part of key company decisions.

Mutual funds are financial transportation which are made up of a pool of money which is collected from many investors to invest in securities like stocks, bonds, money market instruments and some other assets. Professional money managers operate mutual funds and they allocate the fund’s assets and attempt to produce capital gains or income for the fund investors. Mutual funds provide individual or small investors access to manage their portfolios professionally. Every shareholder proportionally participates in the gains and losses of the fund. Mutual funds generally invest in vast number of securities and their performance is usually tracked as the change in the total market capital of the fund which is derived by aggregating performance of the underlying investments. There are major 3 categories which are equity funds, debt funds, hybrid fun. There are other funds also like retirement funds, children’s funds, index funds, exchange traded funds and many other options.

Mutual funds vs Stocks: What should you pick?

Although both these options allow you to invest in equities, here are some reasons that you should take Mutual funds are your route.

Portfolio diversification

Mutual funds invest in a variety of stocks which gives excellent portfolio diversification and reduces concentration of risk. An appropriate number of diversified funds in the industry have atleast 50 or more stocks in their respective portfolios. Such kind of diversification helps in limiting the losses in the portfolio. If stock 1 or 2 gives negative impact then there are other stocks that might give some positive impact. The plus point of mutual funds is that even by investing a small amount of Rs 500 in a mutual fund any investor can get the exposure to a large set of stocks across market capitalization and different sectors in their portfolio.

Variety

While investing in mutual funds you have a large variety of options to achieve your financial goals. There are wide variety of funds catering to different asset classes like equity funds, debt funds, international funds etc. there are funds which are related to specific goals like retirement plans or children’s plan. The decision is yours depending upon your risk profile and horizon. If your risk appetite is conservative then you can choose among debt funds with small exposure and if your risk appetite is aggressive then you can choose across market capitalization curve and even include sector funds in your portfolio. The variety of options available gives you a lot of perks like specific categories or funds to achieve the goals, debt exposure, diversification etc, such options are not available while investing in stocks.

Tax Benefits

The taxation on equity mutual funds are stocks are the same. Tax advantage is that when fund managers move across stocks there is no tax to be paid by you, in the case of direct investing in stocks, you need to pay taxes when you decide to exit a stock depending on your holding period.

Professional management

Mutual funds are professionally managed with a Fund Management team that does a rigorous research on stocks, sectors and also the economy. When it comes to stocks investors have to spend a considerable amount of time studying, analyzing the financial statements of the companies and after going through each and every aspect related to the company they then make a final decision of investing in any company. In other words any individual investor investing in stocks does the work of fund management teams of technical analysts, economists, fundamental analysts and risk modelers, which does make it a beginner’s cup of tea.

Cost

One of the benefits enjoyed by mutual funds is in the terms of cost advantage, on account of huge transaction volumes involved in the buying and selling of stocks. In 2013, SEBI had introduced Direct Plans for the mutual fund industry, under this plan the fund houses deduct the commission payments to distributors from the operating expenses, which leads to a lower expense ratio for the investors. But if you buy stocks directly, then you need to pay charges like brokerage, STT, SEBI turnover charges, GST, transaction charges etc. but until and unless you are doing a regular trade in stocks such expenses tend to be low over the long run.

To sum up

After going through all the above points it is your decision to make whether to invest in stocks or to invest in mutual funds. The above study does not mean that there are no risks involved while investing in mutual funds. Whichever way you select remember it is your money that is put at risk whether at mutual funds or at stocks. Do not invest in what others are investing in make your own decisions make a pros and cons list of all the investing methods then take a firm decision. Lastly if you are a seasoned investor who has the time and expertise to look into financial statements of companies and also have a flair for research then you can consider creating your own personal portfolio of stocks. On the contrary if you are fine with your money being managed by a team of experts whose intent is to give you a consistent return over the long term and if you believe in them then mutual funds is the correct option for you.