Mutual funds and stocks (or shares) are two very distinct financial products that are often misconstrued as identical. You may have asked what is more suitable for you? A mutual fund investment or a share market investment. This is one of the biggest dilemmas several investors face when embarking on their investment journey.
Let’s understand these two unique financial products in detail to decide which is ideal for you.
Stocks are a representation of the total share capital of the company that are traded over the share market. This means that if you are a shareholder, you own a stake in the company.
When companies go public to garner funds for their business, they can receive the same in two ways:
They can borrow from a financial institution or raise debt, or;
They can raise capital from the general public
On the other hand, mutual funds are a collection of different securities such as money market instruments (participatory notes, treasury bills, etc.), debt instruments (government bonds, corporate bonds, etc.), equities (stock), etc. It is an investment vehicle that pools the money of various investors and invests it in these securities.
Thus, mutual fund investments are a form of investment into various financial instruments that are managed by an Asset Management Company (AMC) or a fund house. On the other hand, when you invest in stocks or shares, you are directly handling the buying and selling of the financial instrument. Hence, it is a more active form of investment as compared to mutual funds, which are passive. However, mutual funds being run by a fund manager are actively managed.
In simple words, shares constitute a part of a business, whereas mutual funds are a cumulative investment vehicle that invest in shares, among other asset classes. Before you try to figure out the ideal investment avenue for you, let’s understand the difference between mutual funds and shares.
Mutual Funds vs. Stocks: Which is Better Investment?
1) Professional Management
Leveraging the expertise and knowledge of a mutual fund expert to is one of the primary reasons why individuals consider investing in mutual funds. Investment in shares without prior experience or knowledge about the working of the financial markets can be quite disastrous. It could even easily drain your capital. Hence, experts often advise those new to the investing world to invest in mutual funds via a fund manager.
2) Save tax on mutual fund
When it comes to ELSS mutual funds, Section 80C of the Income Tax Act, 1961, offers tax deduction on investments up to Rs1.5 lakh towards such schemes. Individuals and HUF can use this deduction to reduce their tax liabilities. You can save up to Rs46,800 by investing in ELSS mutual funds. This is one way you save tax on mutual fund investments.
3) Disciplined investment
Another major advantage of investing in mutual funds is financial discipline, which you get to learn by investing through the SIP (Systematic Investment Plan). In an SIP, the investor is required to invest a fixed amount periodically. This automated form of investing in a mutual fund requires an individual to decide the quantum of payment and the frequency of the investment at the start of the SIP investment tenure.
On the other hand, investing in stocks this way can be quite tricky as each transaction would need to be timed and initiated by the investor himself.
4) Cost of Investing
Unlike stocks, which you can buy individually, actively managed mutual funds demand a small fee to be paid to the fund manager(s). However, one often forgets the concept of ‘economies of scale’ that tips their weight in the favour of mutual funds. Active management of funds surely requires extra capital from the investor’s pockets, but due to their large size, mutual funds only ask a insignificant fraction of the brokerage charge from an individual shareholder.
Whether you decide to invest in mutual funds or stocks entirely depends on your knowledge and expertise of the market and the amount of time and effort you are willing to spare. Mutual funds can prove to be a great investment instrument if you are an amateur and aim for steady returns.
Disclaimer: Mutual fund investments are subject to market risks. Read all scheme related documents carefully.