Stocks and mutual funds both are different segments of investments in the stock market. Stocks (also known as equity) represents the ownership fraction in a company. Stocks are bought and sold on stock exchanges. On the other hand, a mutual fund is a diversified investment in various securities with the funds collected from various investors intended to invest in similar types of securities and with a similar time horizon.
You can differentiate them on several parameters like returns and risks. Here are the main keys to distinguish between these two investments.
Stocks and Mutual Funds – Differences
- Mutual funds are managed by experts and professionals.
- Mutual funds are less volatile as compared to stocks.
- Trading cost is lower comparatively.
- Mutual funds have tax-saving benefits.
- You do not need to track individual stocks within the fund. Keep tracking the performance of the fund as a whole.
- You can invest small amounts through SIPs.
- Stocks are highly volatile. This volatility is used by traders to earn profits.
- Stock investments incur a high trading cost.
- Investors can manage stock by themself with the knowledge of the stock market.
- No tax exemption is available. However, investors can reduce taxes through long term capital gains.
- You need to track the performance of each company stock you have invested in.
- You can buy even one stock through a demat account. Like this, there are several other demat accounts benefits, you should consider.
Which is better – Stocks or Mutual Funds?
- Risk Factor
Investing directly in stocks is far riskier when compared to investing through mutual funds. This is because the risk with mutual funds is spread across different securities and stocks cannot hedge against market risk.
- Investment Management
While investing in stocks, you need to do extensive research, especially if you are a beginner and learning how to start trading online. On the other hand, stock market experts have the responsibility to research for mutual funds. And it is managed professionally by a fund manager. They pool money for investment.
- Management Fees
In the case of stocks, there is no need to pay a fee to professionals for a management job. On the other hand, mutual funds pooling is a professional service which is not free. You need to pay a fee, which is usually high, to fund houses for their services.
Parameters to Choose Between Stocks and Mutual Funds
Evaluating the suitability level for these two investments largely depends on the following three factors:
- Time Frame
The selection of right vehicles depends on how much time you can spend to research on your investments. You need to spend time to research the financial statements of companies you are considering for stock investment.
Higher the risk higher the returns. First, you must know your risk tolerance capacity. Decide how much risk you want to tolerate for the return you want. If you want to earn higher returns, then you must accept a higher risk and vice-versa.
Decide what type of fees and expenses you can afford to pay. Tax implications are also considered for this point. ELSS (Equity Linked Savings Schemes) are the mutual fund schemes for which a deduction under Section 80C, Income Tax Act, 1961 can be claimed. Long term stock investment can save your taxes.
Here you have seen that mutual funds and stocks both have their own benefits. Learn about the differences and keep in mind these parameters while choosing one from these two popular investment vehicles.
How to start trading online?
Having fundamental knowledge of the stocks will help to start investing and trading in the stock market. Choose a demat account with low annual maintenance charges and prefer a broker offering at least one-year free maintenance of your demat account. And you are ready to invest in the best-suited investment avenue in the stock market.