When it comes to investing in financial securities, many newbies are confused about investing in mutual funds and directly investing in the stock market. Here is the post explaining the basic differentiating points between stock and mutual fund investing.
Stock market investing represents direct investments in the company’s stocks with an expectation of profits with the rise in price. On the other hand, a mutual fund means investing money in a fund portfolio that comprises different asset classes. It is a collective investment that invests pooled funds from a large number of investors with a common financial objective, like growth funds, hybrid funds, etc.
- What Investment Offers
When you invest in stocks, you get a small stake in the company. A fundamentally strong company can provide its investors with dividend income. If you want short-term gain, you can sell them when the stock price rises. On the other hand, when you invest in mutual funds, you get a stake in that fund, and by owning a mutual fund, you participate in the gains or losses of the fund portfolio.
- Cost of Investing
Comparing the investing costs, stocks investments involve lower charges than mutual funds. Investing costs of mutual funds involve different charges, including expense ratio, load fee, etc., to bear the management costs of the fund house. A professional manages this fund to achieve the profit goals. In contrast, if you consider investing in stocks, you need to bear some account maintenance fees for Demat account services. If you want to be involved in intraday trading, you need a trading account that involves brokerage, STT, stamp duty, etc.
Direct investing in equities or stocks has more volatility than mutual funds. On the other hand, mutual fund investing means an investment in a diversified portfolio in different securities. It is a well-diversified portfolio with investments in shares, bonds, FDs, etc. Therefore, with such a broad diversification, mutual funds are less volatile.
Stock investing is known for its high returns. There are many successful long-term investors in India, like Warren Buffett and others, who have built their wealth by long-term investing in the stock market.
- Risk Involved
Although return potential is high when you invest in stocks directly, the risk is also high. It is a fact that the majority of stock market investors lose money in the stock market. On the other hand, high-ranked mutual funds can offer you decent and consistent returns.
- Tax Saving
There are different types of mutual funds. One of these is the Equity linked saving scheme (ELSS) under mutual funds that allows you tax deduction up to Rs 1.5 lakhs under section 80C. Also, investors need not have to pay taxes if the fund liquidates any security from its portfolio. In contrast, you need to bear a tax when you sell them. There is a tax of 15% applicable on short-term capital gains and 10% on long-term capital gains.
- Experience Required
Direct investing in the stock market requires a good understanding of the trends and movements of the market that impacts the stocks. In contrast, mutual funds are managed by professionals. You can invest in funds without much knowledge about the market directions. Fund managers will keep modifying the portfolio to benefit its investors.
- Investment Horizon
Generally, the investment horizon for mutual fund investing is long-term, say, 5 to 7 years to earn with a capital appreciation or regular dividends. On the contrary, it is your choice to invest in stocks for the long-term or short-term to make profits through trading in India or long-term investing.
- Control on Investment
Investors have full control of their investments if they directly invest in the stock market. You need to decide when and what to buy or sell, etc. In contrast, while investing in a mutual fund, investors do not have much control over their investments, but it is with the fund manager.
To accomplish your financial goals, it is necessary that you invest regularly, and it is equally important to pick the right investment. You can consider direct investing in stocks if your risk appetite is high, or you can consider mutual funds to reduce risk with diversified funds in many securities but at a higher cost as compared to stocks.