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Comparing features to find out which is better - Stock Market Vs Mutual Funds
There is no doubt that Stocks and Mutual Funds are the most popular investment instruments in India. These market securities have repeatedly proven their inflation-beating abilities. However, since there are inherent risks and rewards associated with investing in both, most investors are typically unsure of the better investment option. So, we have compared the difference between Stocks and Mutual Funds. Read on to know more.
Stocks means shares of a company; therefore, investing in Stocks means investing in a single company. Mutual Funds pools money from several investors, and professional fund managers invest the capital in an unspecified number of stocks in one fund. Asset management companies employ Mutual Fund managers who study and time the stock market, buy the Mutual Fund units and base their investments on factors like investors’ risk appetites, estimated returns, funds’ market performance, etc. Conversely, you are essentially a self-appointed fund manager when investing in Stocks.
Consider these differences between stocks and mutual funds to decipher the better option.
When you invest in stocks, you essentially buy or sell shares of one company at a time. However, one mutual fund comprises a pool of different stocks based on themes, sectors, market capitalisation, etc. As such, it affords better portfolio diversification than investing in direct stocks.
A notable difference between Stocks and Mutual Funds is taxability. Investing in Mutual Funds like ELSS enables you to avail of annual tax deductions of up to INR 1.5 Lakh under Section 80C of the Income Tax Act, 1961. Tax benefits are not applicable on stocks.
Risk and returns are critical points of comparison for Stocks Vs Mutual Funds. Stocks are deemed riskier investments but generate higher returns in a shorter duration. Since there are various types of Mutual Funds, you can adjust your investments based on your risk tolerance. E.g., consider Debt Or Index Funds if you have a lower risk tolerance and Equity Mutual Funds if your risk tolerance is high.
Trading in the stock market is all about timing. As an investor, you must time the market and make buying or selling decisions to prevent losses and maximise profits. It helps to enter the market when a company’s stock is under=valued since its prices may only rise in future. As for Mutual Funds, you do not have to bother with timing the market; the fund manager takes care of everything. It, however, helps to check the star ratings, past performance, and NAV of funds before choosing a Mutual Fund Scheme.
While it is essential to compare Stocks vs Mutual Funds, you should note that both investments come with their fair share of risk and reward factors. As a new investor, you can consider investing in Mutual Funds. As your risk tolerance grows, you can invest in stocks too and ultimately develop a diversified investment portfolio.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.
