Investment is the only way to grow wealth over time. It means putting money into any asset in expectation of return. Gone are the days when people were investing in buying gold or land. Now, everybody wants a higher return on their money, which is not possible with buying such assets. Investing in stocks and mutual funds is the best way to get a higher return on investment. Mutual funds vs. stocks: which is best is often confusing. If you plan a trip, you can either choose a sports car or a train; the primary objective is reaching the destination. However, one is faster and more fun, while in the other one, you do not need to do anything other than choose the right one. Similarly, mutual funds and stocks are both the medium for growing wealth. Stocks represent ownership, while mutual funds are a collection of various assets like stocks, bonds, or other securities. To understand it better, let's read the article further.
How Mutual Funds and Stocks Work to Generate Returns
Mutual Funds
Mutual Funds are a type of investments that pool money from investors and invest in diversified portfolios like stocks, bonds, and other securities in order to generate a higher return on invested money. These portfolios are managed by professional fund managers who make decisions on where to invest money based on the market scenario, keeping multiple factors in mind.
Stocks
Stocks known as shares give possession to the owner to buy and sell individually without any third-party involvement. Means, if you have enough knowledge of investing directly in stocks, you can buy those by opening your account with a trusted stock brokerage company, and manage your portfolio. It allows account holders to buy and sell shares as per their will to generate profit. You can also do it by giving money to any broker.
Key Differences between Mutual Funds and Stocks
Mutual Funds vs Stocks: Ownership
Mutual Funds and Stocks are both a medium of investing money in the stock market. Mutual fund units are generally bought and sold through an authorized asset management company. Since it's an indirect purchase of stocks, the buyer doesn’t have ownership of the stocks. While stocks can be bought or sold directly on the stock exchange through a broker via a demat account, which buyer has ownership and can buy and sell the stocks willingly.
Mutual Funds vs Stocks: Safe investment option
Mutual funds and stocks are both good investment options in the stock market. Mutual funds are safer compared to individual stocks as they are managed by skilled portfolio managers who spread investments in various assets, reducing the impact of market fluctuations. Whereas buying stocks involves more risk, as it is directly impacted by market volatility. However, the safety of investment also depends on the specific mutual fund and stock chosen.
Mutual Funds vs Stocks: Growth Potential
Mutual Funds often have a diversified portfolio, which gives potential growth with lower risk, as it is managed by skilled professionals who have experience in managing money with minimum risk, whereas buying stocks may yield higher growth but the risk associated with it is also higher as anything happen in the market directly impact the portfolio either side up or down.
Mutual Funds vs Stocks: Liquidity
Mutual funds are less liquid compared to stocks as they have an exit load, but their liquid funds are quite liquid compared to other funds. Whereas stocks are highly liquid, which can easily be bought and sold with minimal impact on the price. They are easy to convert into cash due to the presence of many buyers and sellers in the market, leading to frequent trading activity.
Mutual Funds vs Stocks: Tax Efficiency
Mutual funds are most tax-efficient compared to stocks. You can get a maximum of 1.5 lakh per annum tax relaxation under section 80C if you invest in a tax-saving mutual fund ELSS ( Equity Linked Saving Scheme). Whereas you won’t get any tax benefit if you invest directly in the stock market. Also, investing in such funds gives you twin benefits of inflation-beating return and tax saving.
Mutual Funds vs Stocks: Time Commitment
Mutual Funds often require less or no time commitment, as they are managed by skilled professionals who carefully watch and manage the portfolio. The investor only has to put money and nothing else. On the flip side, stocks require lots of time as stockholders have to monitor stocks actively and make decisions accordingly.
Mutual Funds vs Stocks: Investment Cost
Though investment cost may vary and depend on the specific fund and the stock chosen, mutual funds tend to have higher investment costs compared to stocks as they associate the multiple costs, which include management fees, expense ratio, and sales charge, whereas stocks have less investment cost which includes Security Transaction Tax, Good and Service Tax, and potentially demat account fees which is generally minimum or zero in various platforms.
Mutual Funds vs Stocks: Risk Levels
The risk level is minimum in mutual funds compared to stocks, as they are diversified and managed by skilled managers who manage the portfolio and take informed investment decisions. Whereas stocks are highly risky as they are managed by the individual and invested in only stocks, so anything that happens in the market will influence the portfolio, either up or down.
Conclusion
Mutual funds and stocks are both the best ways to invest and grow money at a decent rate of return. They both are capable of beating inflation and providing a return that you may not get by investing in any other assets. Mutual Fund vs Stocks, which is better, depends on an individual's personal needs and risk-taking potential. If you are someone new to the market and have no time to watch and research the market, opt for a good mutual fund and invest money through that, which takes no time and stress; you only need to invest money, rest will be taken care of by the fund manager. Whereas if you are an aggressive investor, have a high risk potential, and can invest your time, you can directly invest in stocks and manage them accordingly to get a higher return on your investments.
