The new investors generally remain confused between mutual funds and stocks, they consider them as the same thing. Well, my friend, they are not. Both concepts are different.
In this article, we are going to discuss the differences between stock/Shares and mutual funds.
Before we start with the difference between mutual funds and stocks let’s know about the meaning of both.
What is mutual funds ?
Typically saying, a mutual fund is a pool of money generated with the contribution of different investors and managed by the fund manager. The contributed money is then invested by fund managers in different securities such as stock, bonds, gold, etc. Basically, it provides a gateway to enter into the share market with diversified risk and less cost. When you invest in mutual funds you get the units that represent your stake in all the investments of the fund. There is a number of advantages to investing in mutual funds such as professional management, diversification of the portfolio, liquidity, tax benefit, and much more. But there are some risks also that are associated with mutual funds such as credit risk, market risk, inflation risk, interest rate risk, etc.
What are stocks?
Stocks refer to the ownership certificate of companies. Shares are issued by companies to raise capital for their business expansion or any other objective. There are two types of shares- common and preferred. In the former type, investors get the right to vote at meetings while making corporate decisions. In later one, there is no such provision but they are legally entitled to receive dividends before other shareholders. Therefore both have their own advantage and disadvantage.
After understanding the meaning of the terms, let’s know about the difference between mutual funds and stocks.
On the basis of Return:
It is seen that Stocks have higher return potential than mutual funds although the risk is also higher in the former. Many successful investors have created their wealth with direct investment in stocks but many investors have lost all their money also.
On the basis of volatility:
Stocks are more volatile in comparison to mutual funds. Because in mutual funds, investors get the advantage of diversification that helps to reduce the risk involved while investing in the stock market, direct investment in shares of the company is made.
On basis of tax
Mutual funds are more tax-efficient investments in comparison to shares. There are many mutual funds that provide tax exemption advantage but in stocks, there is no such advantage available.
On basis of cost
Both stocks and mutual funds involve the cost of investing but stocks have lower costs in comparison to mutual funds. It is because of the number of expenses that are involved in managing mutual funds.
On the basis of management
In shares, you will manage your portfolio by yourself for example when to buy, when to sell. But in mutual funds, the portfolio is managed by a fund manager who takes all the major decisions related to the investment of the funds in securities backed with proper research and analysis.
Demat Account
To invest in shares you need a Demat account but in mutual funds, there is no such requirement.
Convenience
Investing in mutual funds is more convenient in comparison to stocks. For investing in stocks you need to open a brokerage account, Demat, and trading account but for mutual funds, there is no such requirement. There is a number of online platforms also which are available nowadays from where you can start investing in mutual funds.
On the basis of Investment
When you invest in mutual funds your portfolio gets the exposure of many asset classes such as gold, debt, equity, etc. for example there are hybrid Mutual funds that invest in both equity and debt. But while investing in stocks you can only buy the stocks of the company.
Control
There is more control over your portfolio when you invest in stocks in comparison to mutual funds. When you are investing in stocks you have full control over your portfolio. You can decide when to buy when to sell and what to buy. But when you invest in a mutual fund all the decisions regarding the investment are taken by the fund manager there is no role that you can play in decision making.
Suitability
Mutual funds are more suitable for a person who does not have that much knowledge about the financial market (novice investor) as the advantage of diversification mitigate the risk of the investor and the fund is managed by the fund manager. But stocks are generally suitable for those investors who have good knowledge of the financial market and can devote their time to monitoring the performance of the stocks.
Hope it is now clear the difference between mutual funds and stocks, both are different things and both have their own advantage and disadvantages.
Happy Investing!
