Key Difference between Stock and Mutual funds

For those who have never invested in equity, it’s hard to know where to start. However, everyone knows there are two distinct ways of investing in equity. One is to choose stocks and buy and sell them yourself. The other is to invest through equity funds. The final goal is the same: to benefit from the superior returns that equity investing offers. However, in terms of what you do, the two routes are completely different.

Since diversification is always recommended in investing, the beginning investor will want to learn the basic differences between the products available. For example, three popular investments are stocks, bonds and mutual funds. Knowing how these investments differ can help the beginning investor on the way to determining what products fit a personal diversified portfolio.

In this post, we are going to discuss the fundamental difference between stock and mutual fund investing. However, before we start talking about the differences, let’s first define what stock and mutual fund investing is.

Stock market investing means investing directly in the stocks of the company. Here, you are purchasing the companies listed on the stock exchange with an expectation to earn profits when the price of that stock goes up.

On the other hand, a mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, FDs, bonds, etc. A professional fund manager manages this fund. When you purchase a share in the mutual fund, you have a small stake in all investments included in that fund. Hence, by owning a mutual fund, the investor participates in gains or losses of the fund’s portfolio.

1.The time required for investing

The total time needed for directly investing in stock is a lot more compared to that of a mutual fund. This is because a fund manager manages a mutual fund.

However, for direct investment in the stock market, you have to do your research. Here, you have to find the best possible stock for investing yourself, and that requires a lot of study, time and efforts.

2. Risk and Return

It is already established that mutual funds have the advantage of reducing the risk by diversifying a portfolio. Stocks on the other hand are vulnerable to the market conditions and the performance of one stock can’t compensate for the other.

3. Tax Gain

Remember when investing in stocks, you will be liable to pay 15 percent tax on your short-term capital gains if you sell your stocks within a span of one year. On the other hand, there is no tax on capital gains on the stocks that are sold by the fund. This can mean substantial benefits for you. The tax saved is also available for you to invest it further thus making way for further income generation through investment. But you will have to hold on to your equity for more than a year in order to avoid paying that short-term capital gains tax.

If you invest in ELSS (equity linked saving scheme) under mutual funds, you can enjoy a tax deduction up to Rs 1.5 lakhs in a year under the section 80c of the income tax act.

Another benefit of investing in the mutual fund is that you do not have to pay tax if the fund sells any stock from its portfolio as long as you are holding the fund.

4. Investment Horizon

When investing in mutual funds, remember that you will have to give the funds at least 5-7 years to generate good returns as these have a longer-term growth trajectory. In the case of stocks, you can get quick and good returns if you choose the right stocks and sell them at the right time.

5. The cost of Investing

Though you have to pay a fee to mutual fund managers unlike in the case of stocks that you buy individually, the economies of scale also come into play. It is true that active management of funds is an affair that does not come free of cost. But the truth is that due to their large size, mutual funds pay only a small fraction of the brokerage charges that an individual shareholder pays for brokerage. Individual investors also have to pay the charges for DEMAT which is not needed in the case of mutual funds.

6. Asset Classification

While investing in the stock market, the only asset where you can spend is stocks of the company Mutual funds are not only restricted to shares but also to debt securities such as government bonds, corporate bonds, etc. They can also invest in Money market instruments like Participatory notes, Treasury bills, etc. which are considered to be volatile and uncertain. Besides, mutual funds also invest in other investment avenues, like Gold, Real Estate, Commodities, etc.

7. Diversification

A well-diversified portfolio should include at least 25 to 30 stocks but that would be a huge ask for a small investor. With mutual funds, investors with small funds can also get a diversified portfolio. Buying units of a fund allows you to invest in multiple stocks without having to invest a huge corpus.