Investors are often torn between deciding the right investment option for their portfolio. One such common problem faced by a majority of investors is choosing between stocks and mutual. This article serves as a mutual fund investment guide and will walk you through both the investment avenues and aid your investment decision.
- Risk and Return
Individual stocks are a high risk-return proposition. There is also a probability that you might end up with negative returns.
Although equity mutual funds have a higher risk owing to the asset class they invest in, they have a diversified investment portfolio. Any negative returns on an individual stock could get compensated by the returns generated by another stock.
Thus, investing in mutual funds help to avoid scenarios of negative returns.
Stock market investment requires you to rely on your research, knowledge, and skills. This may or may not be adequate during all market scenarios. You might be strained by tools and resources which could help you manage equity investments properly.
All of these downsides are not present with mutual fund investments. Mutual fund houses or AMCs (asset managet company) have experienced financial experts, known as fund managers who take care of your investments. Additionally, the fund house or the AMC also has access to all the resources and tools needed to manage the funds.
A well-diversified portfolio ought to comprise at least 15 to 20 stocks, but that might be a vast investment for an individual investor.
With mutual funds, investors with little funds, as low as INR 500, can get access to a diversified portfolio. Purchasing units of a mutual fund permits to invest in multiple stocks without the need to invest a considerable amount.
Due to the economies of scale, mutual fund investments attract reduced transaction costs when buying shares and therefore, pay lower brokerages when compared to direct investments in stocks.
You can also save the yearly maintenance charges on DEMAT accounts as one doesn’t need them to invest in mutual funds.
- Investment Style
When an investor invests in stocks directly, they have to do your their research, based on the experience and knowledge with which they enter the market. The decision of purchasing and selling stocks lies with the investor. Hence, one has full control over the investment decision when they invest in stocks.
In the case of mutual funds, one does not have the freedom to transact stocks or any assets for that matter, during the investment period.
The fund manager does all the tracking, investment, and management on their behalf. So if you are new to the investment world and don’t want to spend much time on stock market analysis, then mutual funds are the best investment option for you.
- Investing / Trading time
Stocks can be purchased at any time during the exchange trading hours, which start from 9:15 a.m. to 3:30 p.m. during which the transactions happen at the current price.
In the case of mutual funds, they can be purchased or sold only once – at the day’s end after the net asset value (NAV) of the fund is finalized.
- Tax Benefits
ELSS mutual funds provide the option to save taxes. Once can save up to Rs 1.5 lac under Section 80C of the Income Tax Act by investing in tax-saving mutual funds.
There is no such opportunity to save tax when one invests in stocks.