Investors are looking to create wealth and continuously explore different investment avenues. They often get confused between mutual funds and individual stocks, and which one is better for them.
In today’s blog post, we will give you an overview of mutual funds and individual stocks, along with the key differences between them and which is better for you.
What are mutual funds?
A mutual fund is an investment tool offered by an asset management company that pools money from different investors, and its fund manager invests the money in different classes such as stocks, bonds, commodities, etc. There are two methods of investing in a mutual fund: one is lumpsum and the other is SIP (Systematic Investment Plan).
Key Features of Mutual Funds
The key features of mutual funds are as follows:
- Professional Management: Investments in mutual funds are managed by the professional fund manager.
- Liquidity: Mutual funds allow investors to buy and sell units anytime. Offering liquidity to investors.
- Diversification: Mutual funds invest your money into different securities under asset class and diversify across multiple asset classes.
What are individual stocks?
Investing in individual stocks means that you directly invest in a company’s business by purchasing shares of the company listed on the stock exchange. The returns of investing in shares depend on the performance of the company; the better the company performs, the higher the return. To invest in individual stocks, one is required to have a demat and trading account.
Key Features of Individual Stocks
The key features of investing in Individual Stocks are:
- Higher Returns: Investment in individual stocks offers a higher potential return. However, returns depend on whether the company is fundamentally strong and capable of outperforming analysts’ expectations.
- High Risk: Stock is highly volatile and can fluctuate sharply due to various reasons such as results and geopolitical conditions. They also lack diversification, increasing overall risk.
- Requires Knowledge: Investment in individual stocks requires knowledge and understanding of financial statements, industry reports, etc.
Read Also: SIP in Stocks vs SIP in Mutual funds?
Difference between Mutual Funds and Individual Stocks
The key difference between mutual funds and individual stocks is as follows:
| Particulars | Mutual Fund | Individual Stocks |
|---|---|---|
| Ownership | Investors do not have direct ownership of stocks. | Investors do have direct ownership of stocks. |
| Risk | Mutual funds carry lower risk compared to individual stocks. | Direct stock has a higher risk than a mutual fund. |
| Review | Minimum monitoring is required in mutual funds. | It requires daily monitoring, as the stock’s performance is required to be reviewed regularly. |
| Portfolio Diversification | A mutual fund offers greater diversification because capital is invested across various asset classes. | As the investment is made in a single company’s stock, it offers lower diversification. |
| Knowledge | It requires a low to moderate level of knowledge to invest in a mutual fund. | Investment in stocks requires comparatively higher knowledge and expertise. |
| Charges | Annual maintenance charges are charged by asset management companies. Hence, it is a low-cost investment option. | Along with the annual maintenance charges, there are other charges applicable, such as brokerage and taxes. It requires a higher cost. |
| Suitability | Mutual funds are suitable for long-term and new investors. | Direct stock investing is suitable for investors with rich experience and active investors. |
| Returns | Mutual funds offer moderate returns. | Investment in an individual stock has higher return potential. |
Which is better, mutual funds or individual stocks?
Both mutual funds and individual stocks are suitable for different categories of investors. The suitability depends on the investor’s risk profile and investment objective.
Mutual Funds
- It is suitable for investors who do not want to track the market regularly.
- Investors who are looking for a low risk investment option can consider investing in a mutual fund.
- Mutual funds are suitable for goal oriented and disciplined investors.
- Investing in a mutual fund is a low-cost investment option.
Individual Stocks
- Only if you have good knowledge of the capital market can you invest in individual stocks.
- Investors who can handle high risk and volatility can consider investing in individual stocks.
- Those who want potentially higher returns can invest in individual stocks.
- Those who can monitor their investment regularly can choose an individual as an investment option.
Read Also: Mutual Funds vs Direct Investing: Differences, Pros, Cons, and Suitability
Conclusion
On a concluding note, both individual stock and mutual funds plays a key role in creating wealth. Investors who do not want to actively manage their investments regularly can consider investing in mutual funds, as it requires minimal monitoring and are a cost-effective mode of investing. However, investment in individual stocks requires enhanced knowledge, as it requires active monitoring. Individual stocks offer higher returns than mutual funds but also carry high risk. Therefore, it is advisable to consult your investment advisor before making any investment decision.
Frequently Asked Questions (FAQs)
What are the key difference mutual funds and individual stocks?
The main difference between mutual funds and individual stocks is related to diversification, return, and risk.
Why are mutual funds safer than individual stocks?
Investments in mutual funds are safer than individual ones as it spreads risk by investing across multiple asset classes.
Which is more suitable for a beginner investor?
Mutual funds are more suitable for beginner investors as it requires less market knowledge and offers professional fund management.
How are gains from equity mutual funds and stocks taxed in India?
All gains from mutual funds and stocks are taxed under the provisions of the capital gains tax in the Income Tax Act.
Is it mandatory to have a demat account to invest in mutual funds?
No, to invest in mutual funds, having a demat account is not mandatory. But it is essential to have a demat and trading account to invest in stocks.
