Financial Awareness Level
Investing in Mutual Funds vs. Stocks: A Comprehensive Guide
Mutual Funds (MFs) and stocks are two popular investment options for individuals looking to grow their wealth. MFs invest money in a portfolio of securities, which can be equity, debt, commodities, or a combination of these. Stocks, also known as equities or equity shares, are investments in the equity shares of individual companies. In this article, we will explore the key differences between these two investment types and help you decide which option may be the best fit for you.
Here are seven key differences between mutual funds and stocks:
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Asset Mix
Mutual Funds: Invest in a portfolio of securities that may include equity, debt, commodities, etc, or a combination of these.
Stocks: Direct investments in the equity shares of listed companies. -
Portfolio Management
Mutual Funds: Stock selection and buy/sell decisions are outsourced to professional fund managers, who need to register as Asset Management Company for Mutual Fund business with Securities and Exchange Board of India (SEBI).
Stocks: Require an in-depth understanding of financial markets, sector-specific expertise, research, experience and analysis etc. to select the right companies to invest in. -
Diversification
Mutual Funds: Have diversified portfolios with 15-20 stocks or more. These stocks could be from different sectors and each individual sector perform differently under different economic conditions. Hence having a diversified portfolio through mutual funds reduces portfolio risk.
Stocks: Can lead to portfolio concentration risk.
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Expertise
Mutual Funds: Allow individual investors to invest in the growth equity markets through a managed portfolio, where a professional fund manager decides the right time to buy and sell stocks. This reduces the risk associated with direct stock investing.
Stocks: Direct stock investing requires a high level of sophistication, investment capital, and experience to pick the right stocks. However, research shows that it has not been beneficial for individual investors due to lack of diversification and the time-consuming nature of stock picking.
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Risk
Mutual Funds: Compared to direct stock investing, equity mutual fund schemes offer a lower level of risk through risk management practices by professional fund managers and their teams. They are able to process large amounts of information and make informed investment decisions, reducing the risk for individual investors.
Stocks: Direct stock investing involves a higher level of risk as individual investors may not have the expertise, experience, or investment capital to make informed investment decisions and properly manage risk. This can result in a lack of diversification and increased concentration risk, where a single poor performing stock can wipe out gains.
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Purchase and Sale
Mutual Funds: Units are generally bought and sold only through Asset Management Companies (AMCs), either directly or through distributors.
Stocks: Can be bought and sold directly on the stock exchange through a broker via a Demat account. -
Management Fees
Mutual Funds: Mutual Funds are permitted to charge certain operating expenses for managing a mutual fund scheme – such as sales & marketing / advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets. All such costs for running and managing a mutual fund scheme are collectively referred to as ‘Total Expense Ratio’ (TER)
Stocks: Attract transaction costs/brokerages when investors buy or sell stocks from a stock exchange -
Capital Gains Tax
Mutual Funds: Capital gains are incurred when the investor redeems (i.e., sells) MF units. There are no capital gains for the investor when the MF manager makes changes in the portfolio.
Stocks: The sale of stocks attracts capital gains tax in the hands of the investor.
If you are considering investing in stocks then here are four essentials you need to be prepared for:
- In-depth research and analysis
- Understanding of financial markets
- Sector-specific expertise
- Constant monitoring of company fundamentals
Difference between Mutual Funds and Stocks: Summary
| Sr. No. |
Mutual Funds (MF) | Stocks | ||
|---|---|---|---|---|
| 1 | MF schemes invest money in equity, debt, commodities, or a combination of these. | Stocks are direct investments in the equity shares of listed companies. | ||
| 2 | With MFs, the stock selection process and buy/sell decisions are outsourced to professional fund managers. | Stock investments require an in-depth understanding of financial markets, sector-specific expertise, research, and analysis to select the right companies to invest in. | ||
| 3 | MFs have diversified portfolios with 15-20 stocks or more that tend to reduce the overall risk. | Stock investments can lead to concentration risk, especially when investing small amounts. | ||
| 4 | MF units are bought and sold only through AMCs, either directly or through distributors. | Stocks can be bought and sold directly on the stock exchange through a broker via a Demat account. | ||
| 5 | MFs charge such as sales & marketing / advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees. | Stock investments attract transaction costs/brokerages when investors buy or sell stocks through a stock exchange | ||
| 6 | Capital gains are incurred when the investor redeems (i.e., sells) MF units. There are no capital gains for the investor when the MF fund manager makes changes in the portfolio. | The sale of stocks attracts capital gains tax in the hands of the investor. | ||
Conclusion:
Mutual funds and stocks both have their pros and cons, and the best investment option for you will depend on your personal financial goals, risk tolerance, and investment knowledge. Direct stock investing may be suitable for individuals with specialized skills, including sector-specific expertise and a deep understanding of financial markets. However, for long-term wealth building, mutual funds are often a safer and more convenient choice, as they provide a platform for individual investors to benefit from professional portfolio management and risk management practices.
Investing in Stocks? You need to be prepared for four essentials (see below).
The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
FAQ Section
What is the difference between mutual funds and stocks?
Mutual funds are investments in a portfolio of securities, which can include equity, debt, gold, or a combination of these. Stocks are direct investments in the equity shares of individual companies.
Who manages mutual funds and stocks?
Mutual funds are managed by professional fund managers, who are registered with the Securities and Exchange Board of India (SEBI). Stock investments require an in-depth understanding of financial markets and sector-specific expertise to select the right companies to invest in.
What is the risk associated with mutual funds and stocks?
Mutual funds have a lower level of risk compared to direct stock investing, as professional fund managers manage the portfolio and make informed investment decisions. Direct stock investing involves a higher level of risk as it requires expertise, experience, and investment capital to make informed decisions and properly manage risk.
What are the costs associated with investing in mutual funds and stocks?
Mutual funds charge fees such as sales & marketing / advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees.while stocks attract transaction costs or brokerages when bought or sold through an exchange.
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Disclaimer
An Investor Education And Awareness Initiative Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. if they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.gov.in. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
