Mutual funds vs stocks, they are two very distinct investment options that are often misconstrued as identical. You may have often asked yourself what is more suitable for you? A mutual fund investment or a share market investment? This is one of the biggest dilemmas faced by investors when they begin their investment journey in market-linked financial securities. Let’s understand these two financial products and evaluate which works better for your portfolio
What is a mutual fund?
Mutual funds are financial vehicles that pool the money of various investors to invest in securities such as stocks, bonds, money-market instruments, etc. to generate wealth. Fund managers professionally manage mutual fund investments.
What is stock?
Stocks, also known as shares, are a representation of the total share capital of the company that is traded over the share market. Hence, if you are a shareholder, you own a stake in the company.
Why are mutual funds better than stocks?
Here are a few reasons why mutual funds are a better investment option than direct investments in stocks:
- Professional Management
One of the primary reasons why investors choose to invest in mutual funds is to leverage the knowledge and expertise of a professional fund manager to earn significant returns
Investment in shares without prior experience about the working and know-how of the financial markets can prove to be disastrous, which can easily result in draining away one’s savings. Hence, it is advised to invest in mutual funds online if you don’t have a thorough knowledge of the markets and wish to keep your money in safe hands.
Unlike a direct investment in shares that invest in individual equities, mutual funds strive to invest in multiple asset classes to hedge the portfolio during volatile market conditions. Thus, mutual funds help to diversify your investment portfolio while mitigating your risk profile.
Buying and selling stocks require ample time and formalities, something that is absent in mutual fund investments. In case of mutual funds, these formalities are done by the fund house or the AMC (Asset Management Company) that manages the fund, for which they charge a nominal fee. Additionally, mutual funds do not require the investor to time the market regularly. An investor can simply put their money in mutual fund schemes for a long time and earn decent returns.
4. Tax-Saving Benefits:
Income generated from equity investment is taxable at the hands of the investor, and there are no tax benefits with direct investment in stocks. However, there are a few types of mutual funds that allow an investor to avail certain tax-saving benefits. Equity Linked Savings Schemes (ELSS), also known as tax-saving mutual funds, are eligible for a tax deduction of up to Rs 1.5 lac under Section 80C of the Income Tax Act, 1961.
5. Overseen by the market regulator:
Unlike stocks, mutual fund houses are subjected to certain scrutinies and restrictions by the national market regulator-Securities and Exchange Board of India (SEBI).
Mutual funds or stocks? Which one is the ideal investment option? There is no right answer. Whether you decide to go forward with mutual funds or stocks, depend entirely on your risk profile, investment horizon and your financial goals. You can also consult an expert who can help you with your investment journey. Happy investing!