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Mutual Funds vs Stocks

Investment is an extremely dynamic and ever-evolving landscape. Taking your time to learn and understand the basic principles of the different classes of assets can lead to greater gains. For beginners, it may seem like a daunting task to undertake, possibly due to the enormous variety of assets. Moreover, in the 'risk ladder,' each asset class has its own relative level of risk, ranging from most stable to most volatile. The major classes of asset, in ascending order of risk, is as follows:

  • Cash: Cash deposits are the simplest, most easily understandable investment asset and the safest.
  • Bonds: Bonds are instruments of debt, where an investor loans money to a company or agency (e.g., Government and State corporations), for periodic interest payments. Once the bond matures, the face amount is returned along with the applicable interest.
  • Stocks: Shares of stock give investors the opportunity to participate in a company’s success through the increase in the stock’s market price and dividends.
  • Mutual Funds: A mutual fund is a pooled investment managed by an investment manager, who exposes investors to a basket of stocks, bonds, or other investment options.
  • Exchange-Traded Funds (ETFs): Since the mid-1990s, Exchange-traded funds (ETFs) have been increasing in popularity. They can be viewed as a hybrid between a mutual fund and a stock, in a sense that, they are pooled investments that trade on a stock exchange like shares of stock.

Well, as you can see from the aforementioned list, both stocks and mutual funds are tagging closely in the risk table, but between the two, which is the best option and why? Let us look at them in-depth.

What is a Mutual Fund?

As mentioned earlier, a mutual fund is a financial asset, composed of a pool of money collected from many investors and it is invested in securities, such as stocks, bonds, money market instruments, and other assets. Mutual funds are run by investment managers, who allocate the fund's assets accordingly and attempt to produce capital gains or income from the investor's money. Mutual fund portfolios are usually structured and purposefully maintained to match the investment objectives it was selected for.

Mutual funds allow an individual or a small group of investors direct access to professionally managed portfolios of investment options. Therefore, each shareholder participates equally in the gains or losses of the mutual fund.

What are Stocks?

A stock ('shares' or 'equity'), on the other hand, is a type of security that demonstrates ownership of a proportion in a company or corporation. In essence, a stock entitles stockholders ownership of the company’s or corporation’s assets.

Stocks are traded on stock exchanges, albeit, private sales are common, and are considered the foundation of most financial portfolios. Stock trading is often regulated by the government, which is aimed at protecting investors from fraudulent activities that would see them lose their money.

Difference Between Stocks vs Mutual Funds

Stocks and Mutual funds are both investment options that have good returns. However, there are fundamental differences between the two.

StockMutual Fund
A collection of shares owned by an investor, which indicates their ownership of a part of a company or corporation.Mutual funds are basically pools of money, from a number of investors, used to invest in a portfolio of assets, e.g., equity.
Stock performance, i.e., its growth, is dependent on the overall performance of that company and the sector it lies in, such as technology, healthcare, industrial, etc.The Mutual fund's performance and its stable returns depend on the macroeconomics, in addition to the skills of the investment manager and the pool of securities.
Stock strategies are determined by the Board of Directors and are subjected to change relative to the prevailing conditions, skills, and experience of the directors in charge.The mutual funds are governed by Securities and Exchange Board of India (SEBI).
These represent an ownership stake in the organisation.These represent fractional ownership over the overall basket of securities, i.e., owning a fraction of the invested security.
Management and administration of the stock are either done individually or with the assistance of a stockbroker.Mutual funds are managed and administrated by a professional investment manager on behalf of the investors.
There is a huge risk component, since the direction of investment is in a single company.In mutual funds, there is the benefit of diversification, thus implying robust earning opportunities in case of failure of one company or sector.
Stock trading happens anytime during the day.Mutual funds trading only happens once a day, usually at the end of the day when markets are closing for the day.
To determine the value of a stock, the individual share price is multiplied against the number of shares.The mutual fund value is computed as the total value of assets after expenses.
Stocks get regular returns as dividends, which tend to vary relative to the organisation's performance and management decisions.Mutual funds, on the other hand, do offer regular dividends to the investors, but of higher value than the market offer.
Stockholder is directly responsible for the stock market returns as the investor directly manages the stock.The investment manager is not directly responsible for the returns. However, their commission and personal increment are hugely dependent on fund management.

Mutual Funds vs Stocks Pros and Cons

After casting a glance at the major differences between mutual funds and stock, have you determined which investment option is ideal for you? Let us look at the pros and cons of each to gain an in-depth understanding of them further. There are four criteria which will help you decide what suits you the best.

Age

In your 20s and 30s, you need to start building your investment portfolio, and the best way to start is by investing in mutual funds. If you have access to minimum capital, mutual funds are ideal. Moreover, you’ll notice your investment growing at a gradual pace. Mutual funds offer greater scope for growth, and your funds will be invested in diverse forms generating revenue from various sources. This is a pro tip for individuals of this age group, but a huge con for the older age group, who are more seasoned in financial matters.

Stock investment, on the other hand, provides generous benefit to those in their 40s and gearing towards senior citizenship. With years of financial exposure and being adept in the investment world, investing your money in stock seems to be a plausible option than mutual funds. You will easily gauge the right type of equities to invest in.

As you can note, mutual funds are meant for new 'kids' on the financial block, whereas stocks are sophisticated and require seasoned individuals who know the financial market or have had little exposure.

Taxation and Tax Liability

Paying taxes is an unavoidable option; however, if you are concerned about the amount of tax you are going to pay for your investment, then investing in equity is the best option. The dividends accrued are usually free from taxation, which is a huge benefit to investors. However, mutual funds will require you to pay capital gain taxes, which is a con for investors.

Control of Investment Portfolio

Again, this feature isn’t applicable to the younger age group, as they are not well adept in financial matters, and they may want easier options where they won’t have to control their investment directly. Rather, they would prefer if it was managed by a professional, and here is where mutual funds investment come in. Mutual funds are like auto-pilot; you invest and forget about it, and you only come back to review it later. However, a downside to this is that you don’t control the companies or financial segments you’re invested in as well as being hardly aware of the market instabilities affecting your investment. In essence, investment decision is minimum.

Stock investment offers you much more control of your investment, and you are well-informed of the happenings of the company you are invested in. There are annual general meetings for stockholders, reports, and market analyses. A downside to this ‘control’ is that you’ll be taking too many risks yourself as the stock market is volatile.

Customisation of Investment Portfolios

Stock portfolios that are well managed are customisable. They are tailor-made to your expectations in terms of risk management, income goals, tax mitigation, and investment strategies. Since it is you who is in complete control of your investment, you are provided with a personal navigation system to your investment.

With mutual funds, think of your investment as getting on the transit and getting off once you reach your destination. There is no personalisation choice available.

Upon careful evaluation of these four factors, you can notice the benefits and limitations of choosing either mutual funds or stock as an investment option. Whether you make an investment in Stocks or Mutual funds, it is completely a personal decision, and given the pros and cons, you should be able to make an informed decision. It should be noted that stocks, in general, provide small scale or individual investors the opportunity to invest in the stock market and directly control it. However, one needs to keep track of the market and stock performance. Also, both the risk and rewards are borne by the investor.

Concurrently, mutual funds provide the option for diversification, which is helpful, as the risk is distributed across the different investment options. Moreover, mutual funds are managed by professionals who are committed and knowledgeable on matters finances, and thus, the investor is relieved of the constant monitoring.

Why Choose Mutual Funds

There are several factors that can help one decide on settling for Mutual funds. Owning a Mutual fund can seem like the best idea because of the following reasons:

  • Convenience: Mutual funds give the average investor an easy way to buy investments that may appear too complex for them to manage on their own without professional assistance.
  • Capital Investment Size: If you have access to minimum capital, mutual fund investment is a plausible option. You can invest any amount of capital, even if you don’t have much financial or experience investing.
  • Diversification: Mutual funds have the capacity to own several individual securities, spanning across different asset classes and various sectors of the industry. Investors are thus given broader diversity on where to invest their capital.
  • Professional Management: Mutual funds are managed by experienced financial professionals who follow the stated investment objectives with federal government oversight.

FAQs on Mutual Funds vs Stocks

Are mutual funds better than stocks?

Despite their clear differences, the best way to come to a defining conclusion on both features is to consider the factors at play, i.e., age – if you are in your 20s and 30s, just starting out, professional management, minimal capital investment, and diversification, then mutual fund investment is the best option. While investment control, tax liability, and customisation is best offered by stock investment. You have to consider which feature works best for you and choose accordingly.

What is the difference between a stock and a mutual fund?

A stock entitles investor ownership of a company’s or corporation’s assets that are selling the stock. Stock trading is regulated by the government, which is aimed at protecting investors from fraudulent activities.

A mutual fund is a financial asset, composed of a collection of capital (money) from investors, which is then used to invest in securities, such as stocks, bonds, money market instruments, and other assets.

Are mutual funds still a good investment?

Mutual funds are an excellent investment if you are in your 20s or 30s, with minimal capital and are new to the financial world and its inner dealings. In addition, if you are looking for investment diversity, then mutual funds would be the best option for you.

What are stocks in mutual funds?

Stocks are investment security purchased by the mutual fund. Simply put, mutual fund have been used to invest in stocks.