What is the difference between Mutual Funds and Stocks?

What is the difference between Mutual Funds and Stocks?

Before entering the world of investment, these two commonly heard terms must be clear in your head. When you invest, you are essentially keeping aside money for the future be it for future investment or the increased need for money. So, when we indulge in investment, we are expected to receive our money with some extra amount as compensation for the foregoing present consumption, and that is ROR or Rate of Return.

Any investment you do required tremendous research, deliberation of your risk appetite, and alignment with your financial goals. These elements are essential to understand what kind of investor are you going to become.

Through this article, we intend to highlight the difference between stocks and mutual funds, which can work in favour of or against you are as an investor.

Hence, the answer to the question, which is the most viable investment option, stocks or Mutual funds? Lies in these points:

What are Stocks and Mutual Funds?

Stocks are investment done in one company by buying the shares of the company in the stock exchange. Mutual Funds are an investment in hundreds of stocks which is another party on your behalf.

Which requires more research, stocks or mutual funds?

Well, the process of buying stocks involves extensive and continuous research about the company and every news about the same as you are directly investing in a brand. Before investing in stocks, you need to view research reports and market information.

Mutual Funds, on the other hand, do not require extensive research as they are managed by industry and financial experts who measure risks before investing the money.

Which one is riskier, stocks or mutual funds?

Well, as they say, more risk is equal to more returns, but for these returns, you need to invest more money as well especially in the case of Stocks. Yes, for example, you want to start investing as a beginner with Rs. 500 and a company’s stock is of Rs. 400. You will be able to buy only one stock.

While, in mutual funds, your funds are managed by a fund manager who receives money from different investors and then invests them in different companies. He will make the investment decision for you based on the objective of the funds.

If there is another important saying in the investment world, it is not put all eggs in one basket which implies that one should not invest in stock or even one type of investment, hence, mutual funds is a great way to start your journey in early investors as they offer you the opportunity to invest in different shares at one time by investing as least as Rs 500.

Which is more time-consuming, stocks or mutual funds?

Another benefit of Mutual Funds is besides offering the diversification and exposure of multiple stocks, it doesn’t force you to go through a time-consuming process of keeping an eye on the markets.

As we mentioned, stocks are brought directly by you, hence you are required to be constantly updated with the news about your stocks to ensure that your money is safe. While on the other hand, mutual funds provide you with timely updates on your performance.

However, with mobile investing and trading apps, this process is easier for both but still, stocks will require you to personally and actively manage your portfolios and account for changes and transaction costs.

Which one offers more control, stocks or mutual funds?

Mutual funds pool money from the investing public and use the same to buy other securities, usually stocks and bonds. As they offer less risk over one single, this unsystematic risk comes with the deprivation of power.

In the case of mutual funds, unlike stocks, you cannot invest in one company or another as you do not have any voting rights. You invest in a fund and they offer you return on the investments in many different stocks (or other securities) instead of just one holding.

How does your investment objective impact stocks and mutual funds?

Well, this is a question that is crucial to decide which option are you going to choose. Because there can be cases wherein stocks can be more helpful than mutual funds and vice-versa depending on what kind of investor you want to become. So, we compare these two investment tools with your investment objectives.

Three factors can decide your investment, safety, income, and tax

• Safety:

We have already covered that mutual fund is safer than stocks as they are professionally managed and the transactions are highly regulated.

• Income:

Stocks are great if you have a good sum of money that you want to invest in a company’s stocks for the long term. While mutual funds offer liquidity and it is very easy to start with Systematic Investment Plans or SIP of Rs. 500.

• Tax Minimization:

For highly paid executives or professionals, well tax minimization is the key factor in their choices of investment. Stocks are more tax-efficient as you can control capital gains by timing when you buy or sell, while mutual funds can be less tax efficient if they offer dividends. You can choose to invest in mutual funds which do not offer dividends to make sure that they are tax-efficient.