When it comes to investments, people often need to be pointed in the right direction when choosing the best investment option. So, if you are a novice in investment, you should know that stocks and mutual funds are popular types of investments. Both enable investors to build their investment portfolios and grow their wealth.
Nevertheless, mutual funds often contain stocks and bonds, whereas stocks have different traits that appeal to different investors with different goals. If you are wondering which is the best investment option and are confused between the two, you’re in the right place.
In this article, we will differentiate between mutual funds vs stocks and determine which provides better investment returns. But before that, here’s a quick run-through of both investment options.
An Overview of Mutual Funds
Mutual funds are unique investment options that pool money directly from the investors and invest across a diversified portfolio. Here, the fund manager creates a portfolio that efficiently aligns with the fund’s investment objective.
Please note that this diversification can either be within or across an asset portfolio. When you invest in a mutual fund, it will give you exposure to all securities within the portfolio.
An Overview of Stocks
Shares are nothing but securities that offer you ownership of a firm. Remember that investing in a stock market comes with a high-risk proposition as the shares are highly volatile. So, before you start investing in the share market, you should have a clear understanding of its techniques and fundamentals.
What are the Differences Between Stocks and Mutual Funds?
Both investment instruments technically differ in management and style, starting from potential risks to the Return on Investment. So, as an informed investor, you must be prudent enough to know about the differences between mutual funds vs equity.
● Management
While making an equity investment, you need to rely on your knowledge, skills, and research. However, this strategy needs to be more adequate in all market scenarios. It’s because you might be constrained by resources and tools that would otherwise help you manage your equity investment appropriately.
Remember, these drawbacks are not associated with mutual funds. The mutual fund houses have plenty of experienced financial experts who are fund managers and can take care of your investments. Besides, they also have access to all resources and tools required for managing funds.
● Risk and Return
Stock purchases are usually a high risk that is very likely to provide negative returns. But even if mutual funds have a higher risk, the diversified portfolio can seamlessly eliminate negative returns.
● Cost
Mutual funds attract lower transaction costs while purchasing shares because of the economies of scale. Thus, they pay lower brokerages as compared to individual investors.
● Diversification
A well-diversified portfolio requires at least 15-20 stocks which is a huge investment for an investor. But with mutual funds, you can get access to a diversified portfolio with funds as low as Rs. 1000.
● Trading and Investing Time
You can purchase stocks during the exchange trading hours that start from 9:15 a.m. to 3:30 p.m. On the contrary, you can purchase mutual funds at any hour of the day.
● Tax Benefits
Section 80C of the Income Tax Act 1961 states that investing in ELSS through SIP enables you to save taxes. You have the option to claim a deduction of up to Rs. 1.5 lakhs from your taxable income. Thus, SIP is one of the best tax-saving instruments with higher returns in the long term.
Which is a Better Investment Option?
Both stocks and mutual funds can offer higher returns over the long term. However, each of them comes with different levels of risk and demands different levels of expertise.
Mutual funds offer diversification, reduce risk, and are efficiently managed by professionals. In contrast, individual stocks require more research and expertise but can efficiently offer higher returns.
Ultimately, the choice between stocks and mutual funds completely depends on your risk tolerance, financial goals, and level of expertise. In fact, a diversified portfolio that includes stocks and mutual funds might be an excellent option for those seeking potential returns and risk balance.
So, before you make any investment decision, make sure you consult with a financial advisor.
To Conclude
Stocks basically represent shares in individual companies, whereas mutual funds include hundreds and thousands of bonds, stocks, and other assets. Even though you can use stocks and mutual funds together in your portfolio, you should consider something that fits your needs.
However, if you wish to take advantage of inflation-beating returns generated by equities, you can consider investing through Edelweiss mutual funds. Here, you won’t experience most of the drawbacks associated with direct equity investment.
Also, you can consider Edelweiss SIP if you wish to commence your investment with a low amount. This mutual fund accepts SIP investments as low as Rs. 100. This way you don’t need to wait till you accumulate a bigger amount in order to invest, you can begin your investment journey in mutual funds with low investment too!