Is It Better To Buy Stocks Or Mutual Funds - Many people wonder which is the best investment option between mutual funds and stocks. Let's differentiate between mutual funds and stocks to get the best returns on your investment.
Both instruments differ in investment style and management in terms of return on investment and risk. As an informed investor, you should be careful to understand these differences before making any investment decisions.
Is It Better To Buy Stocks Or Mutual Funds
Mutual funds are investment options that pool investors' money and invest it in a diversified portfolio. The fund manager is responsible for building a portfolio compatible with the fund's investment objective. Diversification can be done across asset classes or within an asset class. Investing in a mutual fund gives you access to all the securities in the portfolio.
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On the other hand, stocks are securities that give you ownership of a company. Investing in the stock market is high risk. These stocks are highly volatile and are therefore risky investments. To invest in the stock market, you need to have a good understanding of its basics and techniques.
This article will help you understand the differences between stocks and mutual funds and why investing in mutual funds is better than stocks.
When you buy a share, you get legal ownership of the company with voting rights along with the right to participate in the profits generated by the company. They can also attend general meetings and correspond with the company.
However, buying shares is a direct participation in the stock market, the income from which can be obtained in two ways:
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When you invest in mutual funds, you get a share of the pooled fund collected from multiple investors. Your holding is the number of mutual fund shares you have purchased while investing. Your rights and benefits are limited to the fund house.
While investing in stocks, you can invest in stocks as an asset class, but in case of mutual funds, since mutual funds can hold a diversified portfolio, you can invest in one or more asset classes or sub-asset classes.
With mutual funds, you can only earn by selling shares, and dividends received on shares in the program may or may not be directly available to you.
If you have selected the "dividend" option, the fund house will share the dividend received. If you have chosen the growth option, the dividends will be reinvested in the fund to generate profits.
Stocks & Mutual Funds
Now that you understand the difference between mutual funds and stock market investing. Now let's compare the features of stocks and mutual funds to understand which option is better for you.
Individual stock purchases are high risk - high return promise. There is also a chance that you will end up with negative returns.
Although equity mutual funds carry a higher level of risk due to the asset class they invest in, they have a diversified portfolio. Any negative return of one stock can be offset by the return of another stock.
You rely only on your research, knowledge and skills to make an investment that may or may not be appropriate in all market scenarios. You may be limited by the tools and resources that can help you properly manage your investment.
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All these disadvantages are not present in mutual fund purchases. Mutual fund houses have experienced financial professionals who are fund managers and look after your investments. In addition, the fund house has access to all the tools and resources needed to manage the funds.
A well-diversified portfolio should include at least 15 to 20 stocks, but this could be a huge investment for a single investor.
Mutual funds allow investors with small funds of up to INR 1000 to access a diversified portfolio. Buying shares in a fund allows you to invest in more shares without having to invest a large amount.
Due to economies of scale, mutual funds incur lower transaction costs when buying stocks and therefore pay lower brokerage fees compared to individual investors.
Saving Vs. Investing Money
You can also save on annual management fees on Demat accounts as you don't need them when investing in mutual funds.
Direct stock investing involves doing your own research, entering and exiting the market based on it, and spending time managing it.
The decision to buy or sell is yours. Therefore, you have full control over your investment decision when investing in stocks, making you an active investor looking to maximize your returns.
In the case of mutual funds, you do not have the freedom to choose or trade in stocks or other assets during the investment period.
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The fund manager does all the investing, tracking and management on your behalf, making you a passive investor. So, if you are new to share investing and don't want to spend a lot of time researching stocks, then mutual funds are the best option for you.
Shares can be purchased anytime during trading hours on the stock exchange between 9:15am and 3:30pm. during which transactions take place at the existing price.
In the case of mutual funds, you can buy them at any time. However, the applicable NAV depends on the time of purchase. If you buy the shares before 3pm, the applicable NAV will be the same day. All purchases made after 3pm are based on the next day's NAV.
ELSS mutual funds provide you with a tax saving opportunity and can help you save up to INR 1.5 lakh under section 80C of the Income Tax Act, 1961 by investing in tax saving mutual funds.
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When you decide to invest through a mutual fund, you don't have to worry about analysis, selection, timing, tracking and management of purchases. The fund manager will do all the heavy lifting for you.
To maintain a diversified portfolio of stocks, you need to invest in at least 15 to 20 stocks, which means you need to make a big investment upfront.
Here it is more advantageous to invest through a mutual fund. Investing 1000 INR gives you a diversified portfolio of assets, which means investing in equity funds gives you a diversified portfolio of stocks.
Mutual funds take advantage of economies of scale when they buy and sell. They even negotiate with brokers to get better rates, all at a lower cost, indirectly passing on the benefits to shareholders.
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This is not the case when buying shares. Also, you don't need to maintain a demat account when investing through mutual funds.
We hope you now have some clarity about mutual funds versus stocks and which is the better investment option. If you want to take advantage of the anti-inflationary returns of stocks without many of the disadvantages of investing directly in stocks, but are limited in time and expertise, the best way to get these returns is to invest in mutual funds.
Yes, certain mutual funds accept SIP investments from INR 100. Hence, you can identify those funds whose minimum SIP investment is INR 100 and invest in the best ones. Such low investments have helped all the investors to start their investment journey in mutual funds.
Yes, mutual funds are influenced by the stock market. As the disclaimer suggests, investing in mutual funds is subject to market risk. Therefore, investors should be cautious when choosing and investing in a fund. In other words, mutual funds pool money invested in different asset classes. Equity funds mainly invest in stocks or shares of companies. Therefore, any fluctuation in the price of these shares will affect the NAV of the fund. Stock market fluctuations affect mutual funds, although they cannot be huge because a mutual fund is a collection of several stocks and shares.
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Stocks are riskier. Although mutual funds invest in stocks, they offer a diversified portfolio. Therefore, stock market fluctuations do not affect the mutual fund as much as an individual stock. Diversified portfolio balances volatility.
You can start investing in mutual funds from as little as INR 100 through SIP investments. The minimum investment amount for shares depends on the current market price of the share.
Both mutual funds and stocks do not provide any security. They are market-linked instruments and are subject to market volatility. Both tools do not guarantee a return. However, mutual funds offer a diversified portfolio of investments, so the impact of market fluctuations is comparatively less.
Open-end investment funds can be withdrawn at any time. ELSS funds have a lock-in period of three years. These funds cannot be withdrawn until the lock-in period expires.
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The investment period for mutual funds depends on the type of fund. The recommended investment period for equity funds is at least 5 years. For debt funds, the recommended investment period is at least 3 years.
Anjana Dhand is an accountant with over 5 years of experience and a
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