Mutual Funds vs Stocks: Which Investment Is Right for You?
An individual can invest in equities through two primary modes: Direct equity and equity mutual funds. Both options have their pros and cons. Many investors often ask, mutual fund vs stock: Which is better? In this article, we will understand these investment options, the pros and cons of each, the difference between stocks and mutual funds, and which is better to invest in.
Pros and Cons of Stocks
Stock investing involves identifying stocks on your own and investing in them. It requires you to do your own research to identify companies. If the right stocks are selected, you can make good money and create wealth. However, if the selected stocks don’t do well, you can lose money. Let us look at some pros and cons of stocks.
- Highly Risky
While stocks have the potential to give high returns, at the same them they are volatile and vulnerable to big sudden falls. The fall can be due to some issue(s) the individual company may be facing, sectoral issues, economic downturn, or the overall market fall due to external reasons.
As stocks fall in the high-risk, high-return potential category, they are meant for investors with an aggressive risk profile.
- Requires Time and Effort
To invest in stocks, you will have to research the companies for investment. You may have to go through the company financial statements, investor presentations, company and industry/sector research reports, listen to company concalls, attend investor conferences/meetups, etc. All these activities may require a lot of time, effort, money, etc. As this may not be your full-time profession, are you willing to commit all the time and effort required for stock investing?
In the above section, we saw that investing in Direct Equity can be risky and requires a lot of time and effort. So, then should you consider the option of investing through equity mutual funds? Let us find out.
Pros and Cons of Mutual Funds
Mutual fund investing involves handing over your money to a fund manager and letting them invest on your behalf. These are full-time professionals who can manage your money for a miniscule cost. Let us look at the pros and cons of mutual funds.
- Investment Decisions backed by Research of the Fund Management Team
A dedicated fund manager(s) manages every scheme. These are qualified and experienced professionals whose full-time job is to manage the scheme(s). They have a dedicated research team that identifies companies worthy of investment.
The fund manager makes the investment (buy and sell) decisions on behalf of the scheme investors.
- Diversified Portfolio
Most mutual fund schemes spread the scheme money across shares of 30 to 50 companies. Thus, they provide a diversified portfolio to their investors. Diversification reduces the concentration risk. At any given time, some stocks may do well, while some may not. However, due to the diversified nature of the portfolio, the risk goes down, and the risk-adjusted returns are better.
- Choice of Investment Options
Equity mutual funds offer you a wide variety of schemes to choose from. Some of these include:
a) Market Capitalisation-Based Funds
These diversified active funds invest in companies based on their market capitalisation. Some examples include large, mid, small, micro, flexi, multi-cap funds, etc.
b) Sectoral/Thematic Funds
These funds invest in shares of companies belonging to a specific sector or theme. A theme can span across multiple sectors. The risk in sectoral/thematic funds is higher than in diversified market capitalisation funds discussed in the earlier section.
c) Index Funds
These funds invest in all the constituents of a benchmark index as per their weight in the index. The funds give benchmark returns (adjusted for expense ratio and tracking error) at a low cost. Index funds are based on indices such as Nifty 50, Nifty Next 50, Nifty 100, Nifty Midcap 150, Nifty Smallcap 250, Nifty 500, Nifty Microcap 250, etc.
So, you can invest in various schemes based on your needs.
Now that we have seen the pros and cons of direct stock investing and mutual funds, let us understand their differences.
Stock Market vs Mutual Funds: What’s the Difference
Some of the differences between stocks and mutual funds include the following.
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Stocks |
Mutual Funds |
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It is a do-it-yourself (DIY) process where you have complete control to buy and sell the stocks. |
The fund manager takes the buy and sell decision on behalf of investors based on in-depth research & analysis |
|
As it requires a demat account, you will have to incur associated costs like account opening fees, brokerage, AMC, etc. |
There is no need for a demat account. Expense ratio is charged and varies from scheme to scheme. |
|
You have to invest time, effort, and money to research the stocks. |
A qualified and professional fund manager, supported by a research team, invests in various securities |
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Investing in stocks is highly risky as there is concentration due to limited stocks in the portfolio. |
Investing in mutual funds is relatively less risky as the scheme portfolio is spread across 30-50 stocks. |
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The stock prices fluctuate constantly during the market trading hours. |
Mutual funds declare the scheme NAV after the market closes. |
Now that we understand the differences between the two, the question arises: mutual funds vs stocks: which is better? Let us discuss.
Stock Market vs Mutual Funds: What’s the Difference
While stock investing has pros, it is easier said than done for retail investors. If someone has just started investing, they can easily burn their fingers with direct stock investing. Even seasoned investors may find it difficult to continue their winning streak with direct stock investing. Most retail investors have a full-time profession, which is different from stock investing. Hence, considering the time, effort, and money involved in stock investing, it is best to invest through mutual funds. You should focus your time and efforts on growing in your profession rather than on stock investing. Investing should be best left to the experts or professionals in that field.
You can work with an investment expert who can help you identify your financial goals, make a goal plan to achieve them, recommend the appropriate mutual funds, and review the progress regularly till the goals are achieved. You can invest in the appropriate mutual funds and leave it to a qualified and experienced fund manager to invest on your behalf. Equity mutual funds have given good returns in the past. They offer numerous benefits for a miniscule cost in the form of an expense ratio. Hence, they can be your ideal vehicle to achieve your financial goals.
FAQ's
What Is the Minimum Investment for Mutual Funds and Direct Equity?
The minimum investment in stocks depends on the stock price. The minimum investment will be equivalent to the market price of 1 share of the company you want to buy. To diversify across Nifty 50 companies, you will need more than Rs. 1 lakh to buy just one share of each of the Nifty 50 companies.
In the case of mutual funds, the minimum investment usually starts from Rs. 100. To diversify across the Nifty 50 companies, you will need just Rs. 100 to invest in a Nifty 50 Index fund.
Can You Buy and Sell Stocks and Mutual Funds at Any Time?
Stocks can be bought and sold during market trading hours. Mutual fund units can be purchased and redeemed at any time.
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