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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 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 by experts, and a professional fund manager manages the pool of investment. This service is not free and comes with an annual management fee that is charged by the fund house.
If you are a new investor with little or no experience in the financial markets, it is advisable to start your equity investments 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.
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 it. This service is not available in the case of stock investments. You are responsible for picking and tracking your investment.
It is already established that mutual funds have the advantage of reducing the risk by diversifying a portfolio. On the other hand, stocks are vulnerable to the fluctuations in the market, and the performance of one stock can’t compensate for another.
Note that you are levied with short-term capital gains tax at the rate of 15% if you sell your stock holdings within one year from the date of purchase. On the other hand, there is no tax on capital gains on the stocks that are sold by the fund. This is a substantial benefit for you. The tax saved is also available for you to invest in further, thus making way for further income generation through investment.
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. Individual investors also have to pay the fees for Demat, which can be avoided with 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.
In the case of mutual funds, the fund manager decides the stocks to be included in the portfolio. 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 have a lot of 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.
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 long-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? Visit ClearTax to explore your options for investment from a diverse offering of investment schemes.