Spot 9 Differences Between Mutual Funds and Stocks
In our previous articles, we’ve written about mutual funds and their various advantages. As an investor, you may have wondered: how is buying stocks directly different from investing in equity mutual funds? Well, there are several differences, and we’ve outlined nine of these. Here’s our low-down on mutual funds vs stocks:
1. The Expert Advantage:
Most people will find it challenging to find the right stock to buy at the right time. Unless you are prepared to put in a lot of time researching stocks, the chances of your picking a winner is a shot in the dark. Remember that you not only need to know about the stocks you are interested in, but also about developments about the industries they’re in, the state of the economy, and even international events.
Mutual funds have trained fund managers whose only job is to look at the stock market and related developments. Plus the fund managers are backed by strong research departments they can tap to keep abreast of the latest developments. So it’s better to leave the investing to the professionals.
2. Diversify and Prosper:
Let’s say you have Rs 1,000 to invest in equity, how would you choose to do it – by directly investing in shares, or through a mutual fund? Well, Rs 1,000 won’t go too far while shopping for stocks. You might get one or two at the most, and if their prices tank, you lose money. However, if you invest in an equity fund, you will get exposure to many shares for the same amount. So when one or two stocks in your basket don’t do too well, some of the others tend to pick up the slack.
3. Which is Easier?
There’s no question that investing in mutual funds is much easier than directly in stocks. To invest directly, you will need a trading account and a demat account. You don’t need any of that while investing in a mutual fund. All you need is to have your Mutual Fund KYC in place & an investment account on digibank.
4. Small is Beautiful:
When it comes to mutual funds, small is beautiful. You can invest minimal amounts in mutual funds. For example, if you invest in mutual funds through a systematic investment plan (SIP), you can invest as little as Rs 500 a month! You can also benefit from Rupee Cost Averaging. This helps you get more units at a better average cost per unit.
5. More choices:
When it comes to choice in the mutual funds vs stocks contest, which fares better? It’s undoubtedly mutual funds. If, for instance, you have Rs 10,000 to invest, you will be able to invest in a few stocks of a few industries. That same Rs 10,000 will enable you to invest in a variety of sectors and stocks. With Mutual Funds, you can put some of in large-cap funds, some in mid-cap funds and a part of it in sectoral funds. There are so many choices available to suit different investment goals, risk appetites and investment horizons.
6. Taxing Matters:
Another benefit that mutual funds have over stocks is that you can invest in equity and get a tax break at the same time. There are certain types of equity funds called equity-linked savings schemes (ELSS), which can help you reduce your taxable income by Rs 1.5 lakh a year under Section 80C of the Income Tax Act.
7. Let’s Talk Costs:
Investing directly in stocks may be more expensive than mutual funds because you have to pay brokerage fee and Securities Transaction Tax (STT). Plus, you need trading as well as demat accounts, and they’re not free. Because mutual funds buy and sell large quantities of shares, they enjoy the benefit of economies of scale. They may be able to negotiate lower brokerage charges and ensure that you don’t pay as much. One more thing to know, an investment account the digibank app is free.
8. The Right Mix:
By buying stocks, you are limited to only one asset class. Mutual funds allow you to invest in equity and debt, or a mixture of both, depending on your choice. There are balanced funds that combine equity and debt instruments for investors who don’t want to place all their bets on just fixed income instruments or equity.
9. What’s Best for Lay Investors:
Mutual funds are best for lay investors since the latter don’t have to spend a lot of time researching stocks. Information on the kind of returns different mutual fund schemes give is readily available so that an investor can make a decision based on it.
In the ultimate analysis, direct investment in stocks is for those who have sufficient experience and interest in equity markets. If you are unable to spend too much time on equity research, mutual funds are the better bet.
digibank offers Mutual Funds that are instant, paperless, signatureless – even transaction fee-less! What’s more? You get to choose from 250+ Mutual Funds across 15 top-performing asset management companies. So why wait? Login to digibank (app or internet banking) and start investing in a flash with instant Mutual Funds on digibank.
Read up more on Mutual Funds here
Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.