There are a wide range of options for investors who are looking for high return investment instruments compared to traditional savings. Those who are open to deal with instruments exposed to higher risk in anticipation of higher returns, mutual funds and stocks could be the new avenues.
While both are subject to market risks, there are still a number of differences between the two that can leave investors confused when having to choose between one of them. As a new investor, if you are planning to invest in the market and are getting confused between mutual funds and stocks, let’s break it down for you and understand the differences.
It’s advisable to gather all information and make a proper assessment before investing in market-linked instruments as they are prone to risk.
What are mutual funds?
Mutual funds are basically a range of investment options through which money is collected from investors and further invested across a diversified portfolio. In the case of mutual funds, the fund manager is entirely responsible for creating a portfolio that should align with the fund’s investment objectives. The mutual funds invest across asset classes like equity shares, bonds, government securities and gold, among others. This is an instrument to indirectly invest in the equity market.
What are stocks?
Stocks are basically securities that are purchased by investors, giving them ownership over a portion of shares of a company. However, investing in stocks can be a high-risk proposition as they are highly volatile and thus require a good understanding of the market fundamentals. There are high return prospects in stock investments, but risk is also higher.
Mutual Fund vs Stock Market
Risk: Mutual funds have a high risk factor, but they are less risky in comparison to stocks. Considering the volatility of the market, one can end up with negative returns on stock purchases. In mutual fund investments, the fund managers invest across asset classes to mitigate the risk.
Returns: Both mutual funds and stocks offer a high rate of return if invested in the correct manner, keeping in mind how the market functions. Returns on Mutual Funds depend on the investment horizon while stock investments may result in windfall gains.
Management: Mutual funds are usually managed by the fund manager, while investors can themselves manage investments in stock markets. The stock traders can take help from experts or brokerages.
Price: While the prices of stocks fluctuate in real-time due to a number of market factors, the price of mutual funds is decided on the basis of Net Asset Value (NAV) at the end of the trading day.
Tax benefits: Speaking about tax benefits, in the case of mutual funds, ELSS funds qualify for deductions under Section 80C of Income Tax Act, 1961, while there are no tax benefits for investing in stocks.
Considering all the aforementioned points, it can be concluded that while mutual funds and stocks both have a chance of giving higher returns, mutual funds can be preferred as the first option if you have a low risk tolerance. They are comparatively secure, stable, and less risky than stocks.
