What is stock and mutual fund investing?

Investments in stock markets are direct investments made in the stocks of the company. In the stock market, you are purchasing the stocks of companies listed on the stock exchange with the goal to earn profits when the price of that stock goes up.

Whereas,a mutual fund is a collective investment that pools together the money of a huge number of investors to buy a number of securities like stocks, FDs, bonds, etc. A professional fund manager tends to manage this fund. When you purchase a share in the mutual fund, you get a small stake in all investments involved in that fund. Thus, the investor gets involved in gains or losses of the fund’s portfolio by owning a mutual fund.

DIFFERENCE BETWEEN INVESTING IN STOCKS AND MUTUAL FUNDS

Cost of investing  

There are various charges you need to incur while investing in mutual funds such as expense ratio, entry load, exit load, and more. Also, the expense ratio tends to be as high as 2.5-3% in case of best mutual funds.

On the contrary, in the case of stocks, you are required to open a trading account and demat account which involve account opening charges and annual maintenance charges. Also, the major fee you have to pay while investing in stock market is brokerage charges. Along with these, there are different costs such as stamp duty, STT, transaction cost, etc.

However, if compared, the costs of investing in the stock market are lower than investing mutual fund. Though there are brokerage and other charges involved in stocks, there are various costs involved in mutual funds since they are managed by fund managers, costs like management fee, salary of managers/employees, administration charges, operational charges and more are covered while investing in mutual funds.

Volatility in investment.

When talking about market volatility, direct investing in stocks possess higher volatility than investing in mutual funds. The reason is the number of stocks purchased is less such as 10-15 stocks when investing in the stock market which provides less risk of volatility.

However, you can diversify your portfolio while investing in mutual funds by investing in different securities such as stocks, bonds, fixed deposits, etc. This way, even in the case of equity-based mutual funds, you end up investing in as minimum as 50-100 stocks. The broad diversification of your portfolio widens the risk of volatility and thus volatility is lower when investing in mutual funds than stocks.

Return potential

It is very well known that investing in stock markets involve a very high return rate. However, that is not the only aspect to consider while investing in the stock market. Higher return rate comes into action due to higher risk. The risk involved in stock markets is pretty high as well. Thus, the risk factor may lead to losses and not always higher returns.

Whereas, in case of investing in mutual funds, highly ranked mutual funds tend to provide consistent returns to the shareholders. However, returns are not as high as in the case of stocks, but returns from a mutual fund are adequate to secure your future by building wealth over a period of time.

Tax saving

There are various tax deductions in case of mutual funds such as if you invest in ELSS (equity linked saving scheme) under mutual funds, you can get a tax deduction of up to Rs.1.5 lakhs a year under the section 80C of the income tax act.

Also, another tax savings while investing in mutual funds is that you are not required to pay any tax if the fund sells any stocks from its portfolio till the time you are holding the fund.

On the contrary, in the investments in the stock market, you will have to pay a tax. There are no tax benefits or deductions offered in case of investments in the stock market. You are required to pay a tax of 15% on short-term capital gains and a tax of 10% (above a profit of Rs 1 lakh) on the long-term capital gains.

Monitoring

Investors need to monitor constantly in case of investments made in stock market. Since there is no one else to look up for your investments, investors are the only one who can monitor for their own investments. Also, the volatility being so high in stock market, monitoring becomes more crucial and frequent.

On the contrary, in case of mutual funds, there are fund managers who take all the decisions on your behalf and are responsible to keep a check over the funds constantly. Thus, investors do not need to monitor their mutual funds constantly. However, you should always keep a check atleast every year in order to evaluate the performance of your funds according to your goals.

SIP Investment   

Mutual funds provide an opportunity to investors to invest in a systematic investment plan. A systematic investment plan is a period investment plan, wherein, investors can choose to invest a fixed amount, say 100 or 2000, every month, quarter, annual, as per the preference to buy certain units of the fund. SIP can turn out to be a great strategy for some investors as it brings discipline to the investment criteria.

Whereas, there is no such option available in case of investing in the stock market.

Asset class restriction

Investors are bound to invest only in one asset of the company that is stock, while investing in the stock market, which makes it limited for the investors.

Whereas, investors can invest in the different asset class in mutual funds and create a diversified portfolio. Different asset classes that investors can invest in can be debt mutual funds, equity-based mutual funds, gold funds, balanced funds and more.

The time required for investing

The time required and devoted to investing in stock market is quite more than investing in mutual funds. For investments in the stock market, investors have to undergo a thorough research to find the best suitable stocks. This will take a lot of time and efforts as you need to find suitable stocks that correspond to your goals and even after investing, you need to keep a check in researching throughout.

Whereas, in case of mutual funds, a fund manager manages a fund who is responsible for all the operation and activities in the fund. Thus the time required in case of mutual funds is pretty less.

Ease of investment

Investors need to open a brokerage account with a stockbroker to start investing in stocks. For this, trading and demat accounts are required, which are opened by the stockbroker in a minimum period of a week.

Whereas, while starting investment in mutual funds, it takes only 10 minutes to get started. No brokerage, trading or any other account is required in case of mutual funds. You can start investing in the mutual fund within minutes by registering over platforms that are available on the internet for free. You can select the platform and start investing which will take a few minutes.

Time Horizon of investment

The time horizon in investment in stocks can vary from long-term investments to short-term investments. One can keep the stocks for a week or a month and can make surplus. Thus, it depends on the needs and goals of the investors or trader.

On the other hand, the investment duration in mutual funds is usually for a long term ranging from 5 to 7 years. In mutual funds, funds are not traded rather invested for a longer duration to generate returns through capital appreciation or regular income in the form of dividends.

Control on investment

Investors are in complete power and control while investing in stock market. They are solely responsible for making important decisions such as when to buy, when to sell, what to sell, what to buy, how much to buy and sell. All the decisions are made by the investor only.

On the contrary, investors do not get a hand of much control over the investments in case of investing in mutual funds. All crucial decisions such as which securities to buy, which to sell, when to buy, when to sell and more are made by the fund managers of mutual funds. The control investors will have is to find the mutual fund and that’s about it. Everything after that will be in the hands of the fund manager.