Mutual funds vs. stocks are two distinct investment options often misconstrued as identical. You may have frequently asked yourself what is more suitable for you. A mutual fund investment or a share market investment? This is one of investors’ biggest dilemmas when investing 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 various investors’ money 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, or shares, represent the company’s total capital traded over the share market. Hence, you own a stake in the company if you are a shareholder.
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:
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1. Professional Management
One of the primary reasons investors choose to invest in mutual funds is to leverage a professional fund manager’s knowledge and expertise to earn significant returns. Investment in shares without prior experience in the working and know-how of the financial markets can be disastrous, which can easily result in draining one’s savings. Hence, investing in mutual funds online is advised if you don’t have a thorough knowledge of the markets and wish to keep your money in safe hands.
2. Diversification:
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.
3. Convenience:
Buying and selling stocks require ample time and formalities, which is absent in mutual fund investments. In the 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. Also, mutual funds do not require the investor to time the market regularly. An investor can 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 in the investor’s hands, and there are no tax benefits with direct investment in stocks. However, a few types of mutual funds allow an investor to avail of certain tax-saving benefits. Equity Linked Savings Schemes (ELSS), or 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 scrutiny and restrictions by the national market regulator, the 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 depends entirely on your risk profile, investment horizon, and financial goals. You can also consult an expert to help you with your investment journey. Happy investing!
