Mutual funds and equities differ in investment approach and management, starting with the Return on Investment and risk. When you want to be a tactical investor, you need to know the distinctions before making an investment decision. Many individuals wonder whether, of the two investment options, mutual funds or stocks is the better. To receive the highest returns on your investment, let’s look at the differences between mutual funds and stocks.
● Risk and Return
Buying individual stock have a possibility that you’ll wind up with a loss because it is a high-reward proposition. Equity mutual fund schemes have a diverse portfolio, despite the fact that they have a higher risk due to the asset class they invest in. Negative returns on a particular stock can be offset by positive returns on another stock.
As a result, investing in mutual funds allows you to avoid negative return possibilities.
Stock Investment includes your own study, skills, and abilities, which may or may not be sufficient in all market conditions. Tools and services that could help you manage your stock in a company more successfully could limit you.
All of these disadvantages do not apply to mutual fund acquisitions. Mutual fund houses have fund managers who are seasoned financial specialists who look after your investments. The fund house also has access to all of the necessary tools and resources for managing the money.
A well-diversified investment should contain at least 15 to 20 stocks, but for an individual investor, that may be a significant investment.
Investors with small amounts of money, as little as INR 1000, can gain access to a diverse portfolio through mutual funds. Purchasing units in a mutual fund allows you to invest in several stocks without having to put up a large sum of money.
When purchasing shares, mutual funds benefit from economies of scale, resulting in cheaper transaction costs and, as a result, lower brokerage fees than individual investors.
You can also avoid paying annual maintenance fees on Demat accounts because mutual funds do not require them.
● Investment Style
When you invest in stocks actively, you must conduct your own research and enter and exit the market based on that information. You must also spend time managing your investments. It is up to you to decide whether to buy or sell.
When it comes to mutual funds, you don’t have the option to choose or trade stocks, or any other assets for that matter, during the investing period. You become a passive investor because the fund manager handles all of the investment, tracking, and management on your behalf.
● Investing / Trading time
Stocks can be purchased at any time throughout the exchange’s trading hours, which run from 9:15 a.m. to 3:30 p.m., and transactions are completed at the current price.
Mutual funds can only be purchased or sold off one time in a day, at the end of the day, when the NAV has been settled.
● Tax Benefits
ELSS mutual funds allow you to save taxation and can enable you to conserve up to INR 1.5 lakhs via Section 80C of the Income Tax Act, 1961.
There is no way to save money on taxes by investing in equities.
1. Professional Management
When you invest in a mutual fund, you don’t have to worry about analyzing, selecting, timing, tracking, or managing the purchase. A skilled and professional fund manager oversees everything.
2. No Taxes on Short Term Gains
If you sell a stock before one year has passed since you bought it, you will be subject to 15 percent Short Term Capital Gains (STCG) taxes. Mutual fund entities, on the other hand, are exempt from paying STCG on stock trades. The benefits are either dispersed or reinvested in the mutual fund, which might benefit you as a unit holder in the long run. To avoid paying the STCG tax, you must keep your mutual fund schemes for at least one year.
To build a diversified equity portfolio, you’ll need to invest in at least 15 to 20 stocks, which entails a significant initial commitment. Investing in a mutual fund is much more advantageous in this case. You obtain a varied portfolio across assets with an investment of INR 1000, which means when you invest in Equity Mutual Funds - you get a diversified equity portfolio.
4. Lower Cost
When it comes to purchasing and selling, mutual funds rely on economies of scale. They even bargain with brokers to acquire better rates, all of which result in cheaper expenses that are passed on to unitholders indirectly. When you buy stocks, this is not the case. Furthermore, when you invest in mutual funds, you do not need to keep a Demat account.
We believe you now have a better understanding of the differences between mutual funds and stocks and which is the superior investment option. If you want to profit from the inflation-beating gains given by equities while avoiding many of the pitfalls of direct equity investment but are limited by time and knowledge, mutual funds are the best method to do so.