While buying something, if you are confused between two options, you tend to compare a lot of factors. The same goes for investments. Before making your choice between mutual funds and stocks, you must compare a few critical factors.
Here’s a quick reckoner that will help you pick between your shortlisted options:
Particulars
| Mutual funds
| Stocks
|
Meaning
| Mutual funds pool in money from different investors and invest the same across different securities. The profit from such investments is then distributed among investors proportionately.
| Stocks are financial instruments issued by companies. Investments in stocks give you proportionate ownership of the concerned company.
|
Professional management
| Mutual fund investments are professionally managed. Fund managers study the markets carefully and allocate your money to securities in a way that maximises your returns.
| Stocks are individual investments. There are no fund managers to manage your money. You will have to pick, track and monitor stocks yourself or hire a broker by paying a certain sum as brokerage fees.
|
Risk diversification
| Mutual funds spread your money across different asset classes such as equity, debt, gold, etc., each with a different risk-return profile. This helps you minimise investment risks.
| Stocks only let you explore a single asset class – equity. Thus, there’s no diversification of risk.
|
Tax benefits
| Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund that helps you reduce your taxable income by up to Rs 1.5 lakh annually. This is, however, possible only if you opt for the old tax regime.
| You get no tax benefits if you invest in stocks.
|
| Investing cost | Fund houses charge a management fee known as the expense ratio which usually ranges from 0.5% to 1%.
| Stock investments involve multiple expenses such as the brokerage fee, SEBI transaction charges, etc.
|
Clearly, mutual funds have the upper hand in all aspects. You can now make an informed and wise decision.
Are you wondering how to invest in mutual funds? It’s simple! You can visit the website of the fund house, register for KYC if you are investing for the first time, duly fill the investment form and make the payment.
To know more about mutual funds, you can read this article
` This answer should not be considered as 'investment advice'. Kindly consult your financial/tax advisors to determine the financial implications with respect to investing in Mutual Funds. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
(This article is generated and published by ET Spotlight team. You can get in touch with them on etspotlight@timesinternet.in)
FAQs
While mutual funds offer more diversification than individual stocks, most funds focus on companies that fit specific parameters, such as market cap, exposure to a certain sector or something else. So, you may still need some diversification after investing in a mutual fund.
Which are a better investment stocks or mutual funds explain your answer? ›
Advisor Insight. A mutual fund provides diversification through exposure to a multitude of stocks. The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk.
Is it good idea to invest everything in mutual funds? ›
Investing in mutual funds can be a worthwhile investment strategy for many people, but whether they are the right choice for you depends on your financial goals, risk tolerance, and investment preferences.
Why investing in mutual funds is a good choice? ›
One of the primary benefits is diversification, which reduces the risk of loss by spreading investments across a wide range of assets. Mutual funds also provide professional management, allowing you to leverage the expertise of fund managers who make investment decisions based on their research and analysis.
Is it worth investing in stocks? ›
Stocks have historically proven to be a reliable hedge against inflation. Inflation erodes the purchasing power of your money over time, but stocks have the potential to provide returns that outpace inflation. By investing in stocks, you can help ensure that your portfolio retains its real value over the long term.
What are the pros and cons of investing in stocks vs mutual funds? ›
To risk or not to
| Mutual Funds | Individual Stocks |
|---|
| Diversified | Less Diversified |
| Lower Risk | Higher Risk |
| Ongoing Management Fees | One-Time Fee |
| Beginner Friendly | Not Beginner Friendly |
2 more rowsSome of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.
Why individual stocks are better than mutual funds? ›
Stocks are more appropriate for investors who can monitor their portfolios and the stock market for opportunities. Mutual funds are more suitable for investors who want a fund manager to do all of the work for them. Bernat summarizes what investors should consider before choosing the right approach for their portfolio.
What's the safest investment? ›
The concept of the "safest investment" can vary depending on individual perspectives and economic contexts, but generally, cash and government bonds, particularly U.S. Treasury securities, are often considered among the safest investment options available. This is because there is minimal risk of loss.
Who should not invest in mutual funds? ›
Mutual funds are managed and therefore not ideal for investors who would rather have total control over their holdings. Due to rules and regulations, many funds may generate diluted returns, which could limit potential profits.
Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds. These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers.
What are the risks of mutual funds? ›
All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.
Are mutual funds good for beginners? ›
Mutual funds are good options for both beginners and more experienced investors alike. Both types of investors will benefit from the diversification benefits of mutual funds, and experienced investors can find funds that target specific areas they think are poised for growth.
What are the pros and cons of stocks? ›
Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.
How much should I invest in mutual funds? ›
To determine how much to invest in Mutual Funds monthly, subtract your monthly expenses including contributions to your emergency fund and short-term goals from your monthly income. The remainder is what you can allocate to investments.
What are the disadvantages of putting your money in mutual funds and stocks? ›
Cons
- Potential for loss: Mutual funds are not FDIC insured and may lose principal and fluctuate in value.
- Cost: A mutual fund may incur sales charges either up-front or on the back end that are passed on to the investors. In addition, some mutual funds can have high management fees.
- Tax implications:
However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.
What is the best investment right now? ›
11 best investments right now
- High-yield savings accounts.
- Certificates of deposit (CDs)
- Bonds.
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
Money market funds are generally considered to be a very safe haven for your cash. They are much less risky than mutual funds that invest in stocks. However, they are not federally insured and investors can lose money.
