1. Understanding Stocks and Mutual Funds
When compared on the risk factor, stocks happen to be far riskier than mutual funds. The risk in mutual funds is spread across and hence, reduced with the pooling in of diverse stocks. With stocks, you have to do extensive research before investing, especially if you are a novice investor. Visit ClearTax for more details on the various areas of investments. In the case of mutual funds, the research is done, and a mutual fund manager manages the fund. This service is not free and comes with an annual management fee that is charged by the fund house.
2. When investing as a novice
If you are a new investor with little or no experience in the financial markets, it is advisable to start with mutual funds as not only the risk is comparatively lesser but also because an expert makes the decisions. These professionals have the insight to analyse and interpret financial data to gauge the outlook of a prospective investment.
3. Tracking your investment
With an investment in mutual funds, you have the benefit of a fund manager who has extensive expertise and experience in the field. Whether it is picking the stocks or monitoring them and making allocations, you do not have to worry about any of it. This service is not available in the case of stock investments. You are responsible for picking and tracking your investment.
4. 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.
5. Tax Gains
Remember, when investing in stocks, you will be liable to pay 15% tax on your short-term capital gains if you sell your stocks within 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 in 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.
6. 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. Active management of funds is indeed 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 fees for Demat, which is not needed in the case of mutual funds.
A well-diversified portfolio should include at least 25 to 30 stocks, but that would be a difficult task for a small investor. With mutual funds, investors with low funds can also get a diversified portfolio. Buying units of a fund allows you to invest in multiple stocks without having to invest a considerable corpus.
8. Control on your investment
In the case of mutual funds, the decision about the choice of stocks and their trading is solely in the hands of the fund manager. You do not have control over which stock is to be picked and for what duration. As an investor, if you invest in mutual funds, you do not have the option to exit from some stocks that are in your portfolio. The decisions of the fate of the stocks rest in the hands of the fund manager. This way, an individual investing in stocks has more control over their investment than an investor who invests in mutual funds.
When you invest directly, you will need to invest a lot more time and research into your stock while in the case of mutual funds, you can be passive. The fund manager is the one who invests his time to manage your portfolio.
10. 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.
Still unsure about which investment option to choose from? Visit ClearTax to explore your options for investment from a diverse offering of investment schemes.