What is the difference between investing in stock markets and mutual funds? Why mutual funds are better than stock? Let’s have a look here- When you buy a share, you get legal ownership in the company with voting rights and a part of the profits earned by the company in the form of a dividend. Investing in stocks is directly investing money in the company. The earnings can be from the sale of investments and dividends received.
Investing in mutual funds is indirect participation in the stock market. When you invest in mutual funds, you get exposure to the various asset class. Mutual funds pool money collected from many investors and invest it into many securities. For example, one can invest in equities, debt, hybrid, gold etc., through mutual funds.
While investing in stocks, you can put money only in equity. But in the case of mutual funds, it can be investing in one or more asset classes because mutual fund schemes have a diversified portfolio.
In Mutual funds, the fund house shares the dividend or reinvest dividends to maximize returns.
What makes investors choose Mutual Funds over Stock Markets:
One need not analyze, track or manage their portfolio because the qualified and experienced fund managers will handle it. The managers will effectively manage the risks during volatility and will keep a regular check on your portfolio. While investing in the stock market, one should dedicate sufficient hours to understand various stock market trends and manage risks to earn higher returns. In mutual funds, the professional does the risk management and provides the best returns in any market situation.
No Taxes on Short-term gains
15% short term capital tax (STCG) gets charged if one sells their stock before completion of one year from the date of purchase. Mutual fund companies need not pay STGC because they either distribute or reinvest the gains that ultimately benefits the unitholder. But one needs to hold the mutual fund investment for at least one year to avoid STCG tax.
To get some tax benefits, one can choose equity funds for the long term or ELSS (Equity Linked Savings Scheme). These schemes provide tax deductions up to 1.5 lakhs under section 80C. Direct stock investments do not have any tax benefits.
One needs to make a sizeable upfront investment to create a diversified portfolio with 15 to 20 stocks. Mutual Funds give exposure to a diversified portfolio with an amount as small as ₹ 100. If one invests in equity mutual funds, one gets a diversified equity portfolio. One can invest in different asset classes like debt, equity, gold, etc. Direct investments give exposure to only one asset class. In mutual funds, one can select the investment class which is in sync with the financial goals.
Example – If one wants to invest in the short-term, one can select liquid funds.
Mutual Funds work on economies of scale. The fund houses have the negotiating power to get better rates, which leads to lower costs. These benefits indirectly move to the unitholders. One does not need to maintain a Demat account for investing in mutual funds.
Beneficial for new investors
For new investors who lack an idea about risks and returns, mutual funds are a better option than a direct investment in stock markets. Mutual funds investments have SIP options (Systematic Investment Plans)- SIP allows an investor to invest a fixed sum regularly in mutual funds. Depending on the financial goals and risk tolerance, one can choose different asset classes. Professional managers will take care of the portfolios. They take better decisions in a volatile market. A new investor may take the wrong decision while investing directly in markets and incur losses.
Direct investments turn out to be helpful when one has the expertise in selecting the right stocks according to their risk appetite. One needs to be aware of the technical and fundamental analysis tools and the stock related news.
In the case of Mutual Funds, one does not need any expert advice for their investments. But basic knowledge could be of great help. Mutual funds do not provide multi-bagger returns like the stock market but provide reasonable returns with minimal losses if one invests smartly.
What should you do?
Mutual Funds suit all types of investors, even those with low-risk appetites. Choose a mutual fund that matches your financial goals and diversification objectives. Direct stock investments are for those who understand the stock fluctuations and market volatility well and are ready to take the required risks. One can choose mutual funds and stock market investments depending upon their knowledge about return requirements, stock markets, risk appetite, diversification requirements, and time availability to manage the portfolio.
Investment in mutual funds is a better option the stocks because one can take advantage of inflation-beating returns generated by equities without many limitations of direct equity investing. One can earn returns without having any in-depth knowledge and sufficient time.