There are several avenues to invest in. You could pick real estate, invest in start-ups, gold, and so on. However, for a majority of investors, it’s either investing in stock market or mutual fund investment. These are one of the two popular ones that are currently getting enormous tractions given the current market situation.
However, which one should you choose? The question has haunted many for decades as the answer varies greatly depending on your requirements. Therefore, let’s dig deeper into them and see which investment is the most favourable for you.
What are mutual funds and stocks?
Mutual funds are investment plans that institutional investors set up with the help of individual investors. These investments vary significantly on the type of mutual fund and the portfolio of shares they own. Some might deal only with NIFTY50 companies, while others deal with NIFTY BANK. The overall investment could range from few hundred crores to thousands of crores.
Stocks are a piece of equity of a company that you can purchase from the stock market. Its where you are directly purchasing the shares/stocks of a company through a stockbroker where all the dividends that a company might provide you is directly credited to your account. Its direct traded without any middle person other than the stockbroker.
Mutual Funds vs. Stocks
Understanding the differences between mutual funds and stocks
With mutual funds, there are no costs at first. As you keep investing in them through a SIP or one-time, you have to pay up annual expenses ratios depending upon the mutual fund. If you redeem the money before the term ends, you have to pay a commission to the mutual funds, which could eat away a significant portion of your profits.
In stocks, there is no such thing as commission. Instead, there is the only brokerage charged by the stockbroker. Moreover, we are talking about equity here, and the buying of equity is mostly fee but the selling is where you pay 0.01% of the order, which is comparatively less. If you intraday, you end up paying 10 rupees or 20 rupees as brokerage fees on executed trades.
Mutual funds have a great diversification wherein a small investment could see your investment dispersed through different equities in companies and financial institutions. Every mutual fund has at least 7-10 companies under their portfolio spanning different sectors and manage it effectively to get higher returns.
Diversification has to be done by the investor and depends upon the amount of money that you have. If you have more money, you can invest in different companies and see how much profit you can reap. All the research and strategies are devised by yourself which could prove to be a hassle and the risk reward ratio is completely based on your knowledge.
The best part about mutual funds is that you can simply invest a SIP of 500 rupees per month and have experienced investors take care of your investment. Whereas in stocks, you don’t have that option.
The government has started multiple mutual funds that get special tax deductions and exceptions, such as ELSS funds. There are multiple schemes like these under SECTION 80C of the income tax slabs of India. You can claim a deduction of up to 1.5 lakh rupees in a financial year.
There are no tax benefits as such with stocks. You have to pay taxes whenever you sell a stock, and taxes are added to the profits you gain depending upon the short-term or long-term holding of the stock.
Mutual funds have a portfolio diversification where the P&L statements are balanced out if any of the companies aren’t performing as projected. It also allows for a better return factor depending upon the performance of the stock and the company. No doubt, you would get lesser returns in a shorter period, but for higher returns, you would have to wait at least 3-5 years. Also, multiple investors have to be paid off, hence the low returns for a shorter investment span.
However, with stocks, you can earn significantly without paying much on brokerage charges. If you’re an HNI, then you can invest in stocks and see higher gains in a shorter period, provided your investments do see significant growth.
Mutual funds are handled by experts whose primary tasks are handling the funds and studying. The market to make necessary corrections. Its where they decide which company to invest in and how to get maximum gains. They select the top 10 companies and invest in them while keeping the risk management in check.
On the other hand, with stocks, you are solely responsible for depicting the companies you want to invest in. You would have to undertake all types of stock trading analysis to see how well you can reduce risk while maximizing profitability.
Mutual funds and stocks are great avenues for investments. However, for long-term investments, mutual funds are feasible, while stocks have the tenacity to fluctuate greatly in the short term. Regardless of which, both of them provide returns. But a good research strategy and the type of returns with the duration of investment should determine your returns and profit margins.