Mutual funds or stocks
Many often confuse mutual funds and stocks, thinking both are the same. The truth is that they aren’t. In this article, we will be explaining what they are and the difference between them to help you make better investment decisions.
Firstly, What Are Stocks?
A stock is a type of security that demonstrates ownership of a proportion of a company or corporation.
When you buy a share, you get legal ownership in the company with voting rights along with the entitlement to a share of the profits earned by the company.
Stocks are traded on stock exchanges, although private sales are common too. Stock trading is regulated by the government to protect investors from fraudulent activities that would see them lose their money.
Stock strategies are determined by the Board of Directors and are subject to change relative to the prevailing conditions, skills, and experience of the directors in charge.
Management and administration of the stock are either done individually or with the assistance of a stock broker.
The performance of the stock is dependent on the overall performance of that company and the sector it lies in, such as technology, healthcare, industrial, etc.
What Are Mutual Funds?
A mutual fund is a financial asset and consists of a pool of money collected from many investors. The amount is then invested in securities such as stocks, bonds, money market instruments, and other assets.
They are run by fund managers and they allocate the fund’s assets accordingly in order to produce capital gains or income from the investor’s money.
Mutual fund portfolios are usually structured and purposefully maintained to match the investment goals it was selected for.
Mutual funds allow an individual or a small group of investors direct access to professionally managed portfolios or investment options.
Therefore, each shareholder participates equally in the gains or losses of the mutual fund. The mutual funds are governed by the Securities and Exchange Board of India (SEBI).
Please check this blog if you wish to read our detailed article on mutual funds and how they work.
Advantages Of Mutual Funds
Diversification: When you put your money in mutual funds, your fund manager will invest that money in several instruments, such as equity, stocks, debt funds, and other money market instruments.
Since your money is invested across different instruments, the possibility of losing money goes down, if one instrument doesn’t perform as well as the other, they balance each other out.
Hence, your risks are reduced, making your investment safer.
Liquidity: This means the ability of an asset to be converted into liquid cash. But why is it important? Let’s say, you have an emergency and you don’t have enough money in your bank account.
It might not be possible for you to sell the property or get a loan immediately. However, if you made investments in mutual funds, you can withdraw your money easily.
Most of the mutual funds, except ELSS, don’t have any lock-in period.
Cost: Mutual funds are one of the best investment options when we consider the costs involved in the process.
They are relatively less expensive if compared to directly investing in stocks because the benefits of scale in brokerage, custodial, and other fees translate into lower costs for investors.
Uncomplicated: Stock market investments can be complicated but investing in mutual funds is relatively simpler.
The only thing that you need to start investing in mutual funds is getting your KYC verified and you can start investing using online accounts and mobile applications.
Why Choose Mutual Funds Over Stocks?
1. Mutual Funds Are Managed Professionally
One of the main reasons one should consider investing in mutual funds is the knowledge and expertise the fund manager brings to the table.
If you buy stocks without any experience or knowledge, it can turn out catastrophic for you and your hard-earned money. Hence, experts often advise newbies to invest in mutual funds through a fund manager.
2. They save you money
When you buy stocks, you have to buy and manage them on your own. Meanwhile, when you invest in mutual funds, they are managed by a fund manager.
So, people tend to think buying stocks is more economical than investing in mutual funds. However, one often forgets the concept of ‘economies of scale.
Active management of funds needs extra capital from the investor’s pockets but because of their large size, mutual funds only ask for a measly fraction of the brokerage from an individual shareholder.
3. They Help You Save Taxes
If you invest in ELSS funds, you can get a tax deduction on investments up to ₹1.5 lakhs under Section 80C of the Income Tax Act, 1961.
Individuals and Hindu Undivided Family (HUF) can use this deduction to lower their tax liabilities. You can save up to ₹46,800 by investing in ELSS funds.
4. They Help You Grow Your Wealth
When you buy stocks, you can get substantial returns quickly if you choose the right stocks. On the other hand, with mutual funds, you have to stay invested for a tenure of 3 to 7 years to generate significant returns.
But the problem here is that all your stocks can go in the red sometimes and all your gains can be erased in one day. So, be extremely careful when you buy direct stocks.
5. They Make You Disciplined Investors
One of the major advantages of investing in mutual funds is it makes you a disciplined investor. When you invest in mutual funds via the SIP (Systematic Investment Plan) mode, the amount will get deducted from your bank account periodically and then invested into a mutual fund scheme.
However, investing in stocks this way can be difficult as each transaction would need to be timed and initiated by the investors themselves.
In The End…
Mutual funds are suitable for every type of investor – be it a newbie or an experienced investor. They are easy to invest in and investors don’t have to put in a lot of money in mutual funds as one can start a SIP for just ₹100.
There are different types of mutual funds, such as equity mutual funds, which are more suitable for investors with a high-risk appetite, and debt mutual funds, which are more suited for conservative investors.
Even though there is nothing wrong with buying stocks, you need to do a lot of research to buy good stocks and keep a close eye on the performance of your stocks.
These processes require a lot of time and patience from your end. You also have to be careful not to fall prey to gimmicks or any advice that claims a certain stock would grow 50x in a week.
If you feel mutual funds are a right fit for you or wish to add some safe instruments to your portfolio, head to Koshex and create an account with us today.
Koshex is all you need to get your finances on the right track and our platform will help you become a pro at managing your finances in a jiffy. Sign up today.