The Average Assets Under Management (AAUM) of the Indian Mutual Fund Industry stands at Rs. 39.8 Lakh Crore, as on September 30, 2022.
And the all-India market capitalisation for the National Stock Exchange (NSE) stood at Rs. 257.7 Lakh Crore, as on March 31, 2022. These staggering figures portray a positive towards mutual funds and stocks. But which investment instrument do Indians prefer more?
However, the 2022 Consumer Spending Outlook Report by community platform LocalCircles, suggests that 31% of Indians prefer mutual fund investments.
Whereas 10% of Indians invest in stocks. But, why are individuals more inclined towards mutual funds than equities? Let’s find out.
Mutual Funds vs Stocks: A Detailed Comparison
There are primarily two ways of investing in the stock market – equities and/or mutual funds. Investing in stocks refers to buying and selling shares of different companies listed on the stock exchanges.
Whereas, mutual funds are professionally-managed funds involving a basket of securities traded on the stock exchange. These include equities, debt instruments, and/or other money-market instruments.
Let’s now discuss the differences between mutual funds and stocks in detail:
- Investment Style
The investment style varies substantially for mutual funds and stocks. When we invest in stocks, we research the market and select stocks to invest in.
Hence, we do all the heavy lifting. On the brighter side, we have full control over the choice of shares we wish to keep in our portfolio.
In the case of mutual, a professional fund manager allocates funds to different securities. These fund managers are experienced professionals who understand the market.
They are responsible for monitoring the securities held under a portfolio. Consequently, the manager decides the portfolio allocation based on the investor’s needs and risk appetite.
- Stock Market Experience
Investing in stocks requires substantial experience. It may not be operationally difficult, but one wrong move can cost us a fortune, literally. Hence, knowledge and experience of the stock market are crucial. Finding our way around the stock market is no easy task.
It requires time and effort. In addition, we must update ourselves regularly. The market trends change from one day to the next. Hence, updates and research are critical to making an informed investment decision.
Contrarily, anyone can invest in a mutual fund scheme, regardless of their knowledge and expertise. We must, first and foremost, understand our financial objectives, both long-term and short-term.
Factors like retirement planning, tax saving, etc., are critical points to consider. We must ensure that our investments are aligned with those goals.
Since these funds are managed by experts, we need not devote extra time to research stocks. The manager will do the job for us.
- Cost for Diversification
When investing in stock markets, putting all our eggs in one basket is never a wise choice. If the value of stocks fails, we lose hard-earned money.
At the same time, we cannot invest in 15-20 individual stocks to mitigate such risks. Such a strategy can prove expensive.
With mutual funds, we get access to a well-diversified portfolio within our budget.
Portfolio diversification is essential when we are investing in market-linked securities. It not only reduces the risk profile of a portfolio but also gives us the benefit of hedging different assets.
- Investment Risk
Investing in a single stock means effectively placing money at the mercy of one company and its market dynamics. If it does not perform well, the risks are endless.
However, mutual funds invest in a basket of securities. The whole idea of investing in a basket of securities is to hedge against potential risks.
If the value of one stock fails, the others can balance the loss. Losing money in one go is near-impossible since all the stocks cannot fail at the same time.
This remains true even for equity mutual funds. In this case, the fund manager allocates most assets to equities and the balance to debt and money-market instruments.
The debt instruments offset the negative impact incurred by the equities.
To stay invested in equities, market research and monitoring is entirely the investor’s responsibility. Therefore, it may not be the top choice for everyone.
However, the management of mutual funds is taken care of entirely by the fund managers. Hence, they are relatively more convenient and easy as an investment option.
When Should You Choose Mutual Funds Over Individual Stocks?
We can choose to invest in mutual funds over equities, under the following conditions:
- Lack of stock market knowledge.
- Limited time availability.
- High preference towards diversification.
- A desire for more exposure to the stock market at a lower cost.
Since the mutual market opened to private players in 1991, more and more people have shown interest in them. Thanks to regulators like SEBI, investing in mutual funds have become way safer.
We have enhanced choice in terms of asset allocation, management of funds, risk tolerance, and fulfilling financial objectives.
That said, diversification is always healthy for the investment portfolio. Stocks can cause extreme happiness or bring endless despair.
When a stock performs well, it has the potential to generate attractive returns. On the other hand, a mutual fund is a goal-oriented investment strategy.
It helps us meet various objectives and needs. Hence, keeping an open mind about both types of investments is crucial.
Most importantly, adding another layer to our investment portfolio is never a bad idea.
This helps us further open more opportunities for capital gains, in both the short-term and long-term. So, yes, it is a good idea to invest in mutual funds and stocks.
However, both have their advantages and disadvantages. Stocks may not work well for risk-averse investors. Mutual funds, on the other hand, are much safer to invest in.
If you wish to start investing in the stock market via mutual funds, sign up with Koshex today and start your journey towards a rewarding investment experience.
Q1. What is an Exchange-Traded Fund (ETF)?
An Exchange-Traded fund shares its features with both shares and mutual funds. It is similar to a mutual fund in terms of structure. However, ETFs are available to trade on the stock exchange, like individual stocks.
Q2. What is an Index Fund?
An Index Fund is a type of mutual fund that invests in a portfolio of securities per the asset allocation of a particular stock market index like NIFTY 50, Bank NIFTY, etc.