Stock Market vs. Mutual Funds: Which is Better?

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Your investment decisions depend on the risk you're willing to take to gain a quantum of return. If you wish to get higher returns, you need to take greater risks.

The time you take for learning about individual companies is crucial for investing in the stock market. Learning about mutual funds usually takes lesser time. Unless you are a seasoned investor or are prepared to put in a substantial amount of time and effort needed to become one, it isn't beneficial to invest in equities/stocks directly.

Stocks Versus Mutual Funds

The Risk Factor

Stocks are more exposed to market-induced risks than mutual funds. Funds pool stocks under a stock fund or bonds under a bond fund. This streamlines the returns and reduces risk due to two reasons:

  • If one of the companies in the fund has a poor manager, a doomed strategy, or is simply performing miserably, the loss incurred from that company is neutralized by the companies which perform well.

  • Investing in mutual funds is less time-consuming and takes less effort.

From the fund manager's perspective, it takes time to research about the mutual funds, which could pose a major challenge. Fund managers keep updating the companies listed in your kitty; hence, it's sometimes difficult to understand the composition of your fund.

You can look at the past performance of your fund, but when your manager changes the companies listed under your fund, the performance can change dramatically as well. Additionally, mutual funds impose annual management fees, while stocks only bear an initial outlay cost.

Risk-Return Tradeoff

Mutual funds reduce investment risk by pooling stocks or bonds under various types of funds. Diversification in the investor's portfolio substantially reduces the risk; poor performance of a few companies is counterweighted by the good performance of other companies/businesses.

Investing in stocks can be time-consuming

Learning how to invest in stocks can be time-consuming. You need to conduct extensive market research and understand the direction of movement of the stocks and the reason behind such trends. Only then can you determine the most suitable investment option.

For investing efficiently, you'll need to study the financial reports extensively to know the profitability of the company and the strategies that can be employed to increase returns from investments.

To choose mutual funds, you don't need to learn how every company that you have invested in is performing; that's the mutual fund manager's job. However, you'll be required to research the historical performance of the mutual funds. Apart from that, you also need to find out the most promising sector.

Investing in both the financial instruments needs extensive knowledge of the market and the economy as a whole

Tax Liability

All equity portfolios need the investor to relentlessly update his/her portfolio by buying and selling shares as the desirability of the stocks keeps varying. When you're trading shares by yourself, you will be attracting tax liability.

However, in an equity mutual fund, such trading is done by the fund manager and you don't incur a tax liability because the transactions aren't made by you. Using the tax multiplier, you can calculate the amount of tax that can be saved. This might seem like a small amount, but it makes a huge difference in the long run.

Stock Market vs. Mutual Funds: Which is Better

Are you Disciplined Enough?

The stocks should be spread over at least five sectors with a fixed amount allocated to each sector. A certain percentage should be held only in large companies since they tend to be more stable when the market is strenuous. These rules establish a framework which ensures that the portfolio stays safe and diversified from shocks which could hit particular sectors or stocks.

Individuals who invest in the stocks rarely have the discipline and knowledge to do so.

Minimum Investment Size

Everyone looks for higher divisibility in their investments. One of the primary advantages of investing in mutual funds is diversification of the portfolio into smaller and more flexible blocks, starting with amounts as low as 100 rupees. On the other hand, if you want to have an equally diversified portfolio with stocks, you'll require a huge sum of money as a head start.

Cost of Investing

You must pay a fee to a mutual fund manager unlike investing in stocks where you aren't liable for paying any extra amount to someone else for managing. Active management of funds is an affair which doesn't come free of cost. In the case of stocks, apart from the brokerage fees and security transaction tax, you'll also need to pay charges for opening a demat account, which isn't required if you're investing in mutual funds.

Overall, it is relatively cheaper to invest in stocks. Mutual funds charge a fee for the fund manager's services. With stocks, the only charge is the transaction charge.

To Sum Up

Investing in stocks could be a better option for you if you're willing to study the market extensively and understand as well as predict the movement of stocks accurately. If you think that you cannot spare enough time to do a thorough market research, investing in mutual funds is a better option - always better than investing in insurance.


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