Whenever the topic of investing comes up, two investment products are always discussed – stocks and mutual funds. Both make for good investments, and you will find investors that swear by each. However, for you to decide which one is the right option for you, it’s essential to understand the fundamental differences between these two investments.
- Diversification and risk management
Mutual fund investments are a winner when it comes to diversification and stocks here cannot compete. When you invest in the shares of a company, it is a single investment you are making in that one specific company. How your returns turn out depends entirely on the performance of that company.
In mutual funds, however, you are investing in a basket of underlying shares of different companies. Your portfolio performance is not relying on any individual company. Hence, even if one or two stocks underperform or end up in a loss, other stocks that are performing well cover up for it and your overall returns are not significantly hit. This is not the case with investing directly in stocks.
Due to this, mutual funds tend to be less risky compared to stocks. The diversification equity mutual funds provide hedges market risk. Hence, if you have a low to moderate risk appetite, you should consider picking mutual funds over stocks.
- Professional management and control
Mutual funds come with a fund manager who is an expert at investing and handling portfolios. The fund manager makes all material investment calls like the scheme’s asset allocation, rebalancing, buying and selling as per changing market conditions, and more. Hence, when you invest in mutual funds, your money is being professionally managed to generate the best possible returns.
Stocks, however, don’t come with this benefit. When you invest in stocks, you are all on your own in every investment decision you make. You have to conduct your own analysis and keep closely tracking the markets to know when to make buy/sell decisions. While this gives you all the control by putting you in the driver’s seat, you also have to play an active role in your investments.
Most people choose to invest in mutual funds when they are beginning their investment journey and do not have much insight into how the markets work. Mutual fund investments allow you to play a more passive role while still meeting your financial goals like wealth creation.
Stocks vs mutual funds: What should you choose?
Investing in mutual funds is a quicker, easier, and less risky for beginners to invest in the market. For instance, you need a trading account and demat account to begin investing in stocks, but this is not required when you invest in mutual funds. Moreover, when you choose to invest in mutual funds, you can also opt for the Systematic Investment Plan (SIP) route which allows you to invest small amounts regularly instead of investing a lumpsum. You can also use an online SIP calculator to calculate mutual fund returns.