“Stocks vs mutual fund investment, which one is better” is a common question for prospective investors. To be clear, there isn't a right or wrong choice here. When it comes to stock picking or equity investment decisions, you may be solely accountable for your own decisions. On the other hand, a fund manager makes this decision on your behalf if you choose to invest in mutual funds.
Before deciding which asset class to invest in, you should consider a few important considerations and the difference between stocks and mutual funds. What are those differences, you might ask? Read on to find out.
Equity is a term used to describe a company's ownership stake in the stock market. In a nutshell, it is the entire amount of money that a share is entitled to receive if all of a corporation's debts and assets are liquidated. Think of it as a flight seat. Once you pay for the ticket, you technically own a flight seat, and until the journey is completed, you will be the owner. Stocks are the same; till the time the company is liquidated or pays off its debt, you will be the owner. Investing in a firm's stocks creates a kind of equity ownership in the company.
Investments in shares, bonds, marketable securities and different assets are made possible through mutual funds, a financial vehicle in which a group of investors combines their funds. Experienced and adept money managers run mutual funds. These professionals act like guardians of your money and deploy the fund's assets to yield capital gains or profit for the fund's investors. Check out the video below to understand how mutual funds work:
To decide which option suits you best, you must first know the details of each and how they differ. Let us understand the differences between equity and mutual funds-
Investing in mutual funds is best suited to those with low-risk tolerance. Because all investors share the risk in a mutual fund, each investor is only exposed to the average level of risk. Investors in the stock market, on the other hand, are more aggressive and take on more risk in exchange for a greater reward. Investing in mutual funds is thus considered to be less risky than doing so directly in stocks.
Investing in mutual funds gives you access to a fund manager with deep industry knowledge and experience. You don't have to bother about choosing the stocks or keeping an eye on them and allocating them. Investing in stocks does not allow you to use this option. Investment decisions are yours alone to make and keep track of.
Diversification is one of the most important investing principles since it reduces risk and provides a more stable portfolio. When you have a well-diversified portfolio, it's easier to handle turbulence in the market. Diversification can be achieved by holding a portfolio of 10-15 stocks from several industries. Single-stock investments expose investors to a company's entire field of business. For example, if you invest in a technology company, you are only exposed to that area.
Investing in a mutual fund, on the other hand, allows you to diversify your portfolio. This is because the fund's underlying portfolio includes investments in several industries. It helps diversify your portfolio and provides you with the opportunity to increase your long-term gains.
Diversification of a portfolio reduces risk, and it is well-known that equity-diversified mutual funds provide this benefit. On the other hand, stocks, or equity, are susceptible to market changes, and the profitability of one stock cannot compensate for the failure of another. However, you can consider investing in equity funds based on your risk profile.
Keeping a close eye on the market is a need for investors. Due to its extreme volatility, investing in the stock market carries a higher level of risk. Stock market values may rise or fall in a matter of minutes. On the other hand, investing in mutual funds is more secure due to the diversification of your portfolio and the dispersion of loss and gain among the shares.
Mutual funds are a good option if you don't want to devote your entire time to tracking market trends and evaluating your investments' performance.
General investors and first-time investors can benefit greatly from the fund manager's expertise provided by mutual funds. The competence and expertise of individual investors, on the other hand, are what determine the success of a stock investment.
The expense ratio is used to calculate the mutual fund's service costs. Under regulations, this charge is limited. The cost associated with creating and maintaining a Demat account is incurred for direct equity. Stock trades also incur Security Transaction Costs. Before deciding to invest, investors should be aware of these costs.
The minimum investment amount for mutual funds is ₹500. They may also take advantage of the SIP option, which allows them to invest regularly in a disciplined way. At the same time, investments in common stock are unaffected by market fluctuations. Small investors may be unable to afford some stocks' high prices.
There is no difference in taxes between mutual funds and direct equity investments. Short-term capital gains are taxed at 15% if the holding period of the stock or mutual fund is shorter than a year. Similarly, long-term capital gains emerge if the holding period is longer than a year. In the absence of indexation, long-term capital gains are subject to a 10% tax rate on amounts above ₹1 lakh.
If you are a risk-averse investor, you may want to invest in mutual funds over equity. You should choose equity investments if you are willing to accept risks, want to build money quickly, and desire a high degree of liquidity. In the same way, investors who don't want to spend time scrutinising the market but want a stable return should go for mutual funds.
However, if you have a keen eye for market fluctuations, can bear the risks associated and feel you can grow your money on your own, then you can take a shot at the stock market. It all boils down to your investment method and commitment to growing your wealth.
Investing can be a little complicated, and you may feel overwhelmed when it comes to choosing the right option. Understandably, you feel curious as to why some people opt for stocks while others prefer mutual funds. There is no denying that both equities and mutual funds come with their own set of advantages and also a few disadvantages, but as an investor, you need to make the final decision.
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No. Equity involves investment in individual shares of a corporation, but mutual funds involve creating a pool of money from various investors and then investing it in the stock market.
If you have stock market expertise and experience, you can invest directly in stocks, thus, going for equity for a more significant return. Otherwise, it would be best if you considered investing in mutual funds. Both come with their pros and cons thus you should make a well-informed decision.
Equity investment is money invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange.