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Mutual Funds vs Stocks: differences, returns, risk, & performance

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Created on
July 8, 2022


What’s Inside

With a record-breaking number of new investors entering the market in the last few years, it is natural to feel FOMO or the ‘Fear Of Missing Out’. In this case, FOMO is good. Building an investment fund for your future is a good idea, and starting early is great. As per several reports, it is no surprise that 47% of the recent new investors are millennials.

If you are considering jumping into the world of financial investments, we are here to demystify the two main and most popular investment instruments available. So, let’s get down to it.

Here’s a quick introduction to stocks and mutual funds and what sets them apart.

What are stocks?

Simply put, stocks are the shares of a public listed company that are openly traded in the stock market. Owning stocks of a particular company gives you proportionate ownership of it. 

What are mutual funds?

Mutual funds are a pool of money collected from various investors and put to use by buying a basket of stocks. In most cases, the collection of stocks in a fund is related to a common theme. You, as an investor, get units (not ownership) of the fund in proportion to the money invested by you.

The principal differences between the two are:

Convenience and ease of investing & tracking

Mutual Funds

Mutual funds are the recommended choice for the new investor due to the less time and effort it takes to invest in them. Typically, all you need to do is complete your e-KYC, and you’re ready to go. The entire process is online, paperless, and swift. You need to first open a demat account with a broker to trade in stocks. While this too, can be done online, it is a relatively long process and may be considered a one-time initial hassle. 

Mutual funds provide the convenience and flexibility of investing via the Systematic Investment Plan (SIP). Using this, you can invest small amounts of your choosing (as low as Rs. 500) monthly and invest in lump sums whenever you can afford it. 


Stocks, unfortunately, do not allow for SIPs, neither do they give the flexibility of investing the amount of your choice. Stocks can only be bought in multiples of the value of a single share. So, if one share costs Rs. 50, then you can only invest in multiples of 50.

Once an investment is made, there needs to be some amount of monitoring and tracking done as well to make sure your financial health is in order. In the case of mutual funds, there is usually a team of analysts led by an experienced fund manager who takes on this responsibility for you. Hence, the effort required on your part is minimal, which can be a big relief in the hectic hustle of daily life. 

When it comes to stocks, you need to monitor their movements regularly and time your exit in an opportune manner. This may be time-consuming and not suitable if you have other important commitments that need your attention.

Diversification of portfolio

Diversification is a tried and tested method to safeguard your investment portfolio from high market volatility. When you buy a mutual fund, a collection of underlying securities form a part of it. Essentially, a basket of stocks. Even if one or two of them are underperforming, the overall Net Asset Value (NAV) is evened out by the performance of the other stocks the fund comprises. 

While buying stocks,your investment in that stock is solely dependent on the company's performance. Up or down, there is no way to balance it unless you have a collection of stocks from several different companies, which will need to be individually monitored. Hence, stocks are low on offering a diversified portfolio.


Stocks score high on liquidity as they can be sold off anytime during the market trading hours. There is no stipulated period to hold on to them (except in certain rare cases). 

Mutual funds are fairly liquid as well, however, quite a few of them come with a 1-year lock-in and an exit load. This exit load is the penalty charged by the fund house in case you redeem more than the permitted units before the expiry of the lock-in period. It is usually between 1-2% of the NAV at the time of redemption. 

Tax Benefits

Mutual funds have the upper hand here. By investing in Equity Linked Savings Schemes (ELSS), you can save up to Rs 1.5 lakh each year in tax under the Section 80C of the Income Tax Act. Stocks have no such tax-saving provisions. 

Cost of Ownership

Mutual funds are controlled by Asset Management Companies (AMCs) which assign fund managers with proven experience in the field. They track the performance of each of the fund’s underlying assets and also rebalance the portfolio based on prevalent market swings. 

However, this service does not come for free. Fund houses charge a fee to pay for the fund manager and their team. The fee is known as the Expense Ratio and is spread across all the investors in that fund. It is expressed as a percentage of the NAV at the time of redemption and can range from 0.3% for passively managed funds to 1.5% for actively managed ones. This can be a high cost, especially if you have accumulated a large amount in your fund. Apart from this, there are no other significant costs associated with investing in a mutual fund. Also, check out some of the top Index Funds with low expense ratios to invest in using your Fi app.

In the case of stocks, the first cost is opening a demat account. Then there can be costs associated with your account’s annual maintenance. Moreover, they may also be brokerage charges for each transaction (fixed or a percentage amount) payable to the broker. Finally, there is GST, stamp fee, and other charges that may be levied.

Direct control of investor

Mutual funds are managed by fund managers, hence your influence in the asset allocation is nil. In other words, you have no choice in the stocks of companies that build the fund portfolio. This is why they are good for new investors, as it rids them of the requirement to study, research and evaluate stock performance. 

However, investors with market experience may wish to handpick their stocks and allocate money accordingly. This is only possible by means of buying stocks of individual companies as per your research and strategy. You can decide what to buy, when to buy, and how much to buy in stocks. And the same is applicable while selling.

To sum in up

Investing is far superior to simply saving, especially when you’re looking for a financially healthy future. An ideal investment portfolio should contain elements of different financial instruments like mutual funds and stocks across various asset classes like equity, debt, commodity etc. Before investing in either of them, the first step should be to assess your current financial situation, estimate your goals, objectives, and investment horizon, and gauge your risk appetite. 

Frequently Asked Questions

1. I have heard one can get better and faster returns by investing in stocks. Is this true?

This is a myth .The stock market can indeed have some extreme swings, and selling the right stock at the right opportunity can give you excellent returns. The reverse also holds true, though. Nobody can predict market volatility, and it affects stocks and mutual funds alike. So, instead of looking for that obscure goose that lays golden eggs, be pragmatic and always research your stocks carefully before investing. The best investments are usually long-term with steady returns.

2. What is the right age to invest in stocks and mutual funds?

In order to have a fund that sustains you well into your retirement and that allows you to maintain a comfortable lifestyle, you should consider investing as early as you can. If you feel you are unable to spare a large enough amount to invest in stocks or do not have sufficient knowledge and confidence, then opt for SIP-based mutual funds. Check out how Fi can help you invest small amounts regularly using its Auto-Invest FIT rules and lead to significant returns in the long run.

3. Are mutual funds better than stocks?

What's better for you between mutual funds and stocks depends on your risk appetite and financial goals. if you're looking for more risk averse growth over a long term, then it's better to look into mutual funds.

4. Which is more profitable stocks or mutual funds?

While there isn't a black and white answer to this, Mutual funds offer more opportunities for diverse growth. Stocks on the other hand offer quicker financial growth.

5.Are mutual funds or stocks safer?

Mutual funds are generally more risk averse than stocks. One of the reasons behind this is being a part of a pool of investors, rather than investing individually.

6. Why do people invest in mutual funds rather than stocks?

People who prefer mutual funds over stocks usually do so factoring in their preference for risk-averse and long term growth.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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