The Buyt Desk
Every new investor before he/she starts asks this question, “Where should I invest, stocks or mutual funds? Which one is better for me?” Only good research helps you make decisions.
Making an investment decision is overwhelming and daunting. Many options in the market make it complicated to understand all aspects of every option. There are stocks, real estate, mutual funds, bonds, insurances and money markets to choose from. It is better to study well before investing so that you can understand the risk and returns better. Choose the one which is best suited for your financial appetite and tolerance. Make sure you do not put all your eggs (read funds) in one basket. Stocks and mutual funds are two things that new investors want to invest in. Let us understand what these two mean.
What are stocks?
Stocks /shares are a small fraction of a company’s value. It is a physical representation which is traded in the stock market. Once a company goes public, its total value comprises collective worth of all the shares owned by shareholders and the stocks in the market. Every shareholder owns a small piece of the company and they are part of the annual shareholder meets. Investor can manage his/ her stocks without any manager. Investors can buy or sell the stocks anytime they want and these transactions happen through the Demat account.
What are mutual funds?
Mutual funds are a big basket containing collections of shares and bonds from several companies. It is managed by the managers who are part of the Asset Management Company (AMC). There are two types of mutual funds, Equity mutual fund (collection of stocks) and debt mutual funds (collection of government bonds and securities).
How are Stocks and Mutual funds different?
Professional management – The process of selecting stocks can be very laborious and time consuming, and requires your expertise. While mutual funds are managed by a team of fund managers and analysts, they conduct thorough research before investing in stocks and bonds.
Keep yourself updated with current affairs – For stock trading, you need to constantly monitor not just the market but also the news that impacts the market. Right from political to geopolitical news plays a role in market movement. While in mutual funds, the team handling your funds will keep a close watch on all the development.
Tax advantage – As there is frequent trading of stocks, there are many short and long term gains that you need to record and keep track of. Managing data of dividends, rights, bonuses and other corporate benefits is cumbersome and changes your taxation plans. While for a mutual fund you need not maintain any such records as there is a team doing things for you. The fund manager takes care of booking profits and trades in equity without affecting your taxation. You just have to show the transactions of purchase and sale of mutual funds.
Stock selection – In stock trading, selecting stock from thousands is very difficult and tedious. While in mutual funds, a group of analysts does the job for you and tracks your investments.
Cost – Stocks trading attracts many costs like turnover tax, Demat charges, exchange fees, brokerage fees etc, while in mutual funds you only pay an expense ratio of the fund.
Diversification – Stocks are of specific companies. For diversification in stocks, you may have to choose various stocks belonging to various sectors. While in the mutual fund individual schemes in themselves give diverse exposure to many stocks and bonds.
Discipline in investing – Deduction of fees and charges while trading stocks is very random. While in mutual funds it is much disciplined. A predetermined amount is auto deducted on prescribed dates.
Profitability – Profits in stock trading may happen immediately or take years based on the stocks you have invested in. All investments made will not have profit together but in different timelines. While for mutual funds, the profits are the combined effect of the whole bunch of stocks your funds are invested into.
Saves time – Stock trading needs lots of time and energy to do everyday study and be updated so that you do not lose your money, while mutual funds do not need your frequent attention.
Regulatory compliance – Stock traders need to comply with the regulations of the company, while mutual funds are kept under various checks by strict laws of SEBI and other government machinery.
Where should you invest?
For a new investor, investment in mutual funds is better as it is managed by the investment house or an AMC. Stock trading needs investment in direct form that is direct purchase and sales of stocks and shares. For investors who know the market better and have prior experience, investment in stocks is advisable. All handlings of stock trading should be done by the investor which is time-consuming and selecting stock is a lot of work.
You should analyze your competence, time you can dedicate to this, your knowledge of stocks and share market, experience with investments and risk-taking buffer to decide on where to invest. If you are looking for steady wealth growth and lower risks then mutual funds are your option. If you have enough time in hand and good knowledge about market conditions then you can go for stock trading. But if you want to invest in a manner where you don’t want to track stock prices on a daily basis then a mutual fund will be the right choice.
