STOCK MARKET VS MUTUAL FUND INVESTMENTS

STOCK MARKET VS MUTUAL FUND INVESTMENTS

First, a basic definition of stock market and mutual fund is important to grasp the difference between the two.

WHAT IS A STOCK EXCHANGE?

Buying stock in a firm is what it means to invest in the stock market. To profit from the stock market, we invest in companies that are traded on the stock exchange and hope that their share prices will rise.

Shareholders in the stock market have the right to a share of the company’s profits. When we say “share,” we mean “portion” of the corporation.

When a business needs cash, it will sell its stock to the general public. As a result, investors acquire a stake in the firm by paying money to the company in exchange for a portion of the company’s stock.

WHAT IS A MUTUAL FUND?

A mutual fund is a type of investment vehicle that combines the contributions of multiple investors. It’s termed a mutual fund since it’s invested by a large group of people at once.

A fund manager is responsible for overseeing a mutual fund’s operations. He invests in stocks, bonds, and securities for his clients.

All of these securities’ market performance is taken into account when determining the investors’ returns. The fund manager charges investors a modest expense ratio in exchange for his services.

Mutual Funds, on the other hand, are an indirect method of investing in the stock market in which you only have to put your money in, and the fund manager takes care of the rest.

DIFFERENCE BETWEEN STOCK MARKET AND MUTUAL FUND

There are two ways that mutual funds spread out their investors’ money. A mix of stocks and bonds makes up the portfolio of a mutual fund plan. Your mutual fund plan has a lot to do with this question.

Bonds are viewed as more secure than stock investments. There is less risk in your Mutual Fund portfolio if it includes equities and bonds.

This position is less risky if you don’t have any bonds in your mutual fund portfolio (i.e. all of your money is put solely in equities).

How?

In a mutual fund portfolio of 50 companies, a single company’s downfall will not have a significant impact on the rest of the portfolio. For example, (a mutual fund is composed of) several individual stocks.

Risky: Direct stock investments carry a lot of risk. For example, let’s say Rajesh has 1,000 shares in ABC Ltd. ABC Ltd. has accounted for 2% of the mutual fund’s assets.

If ABC Ltd goes bankrupt, Rajesh will be the one to bear the brunt of the loss, not the mutual fund investor.

1. Stocks, on the other hand, are more volatile

Investing in stocks through the stock market has the potential to yield high rewards. The stock market is your only option if you’re looking to increase your short-term profits. This requires, however, thorough investigation and evaluation. Losses in the stock market are far more likely if thorough research isn’t done.

For strong returns, you’ll need to hold onto your mutual fund investments for a long time. As with the stock market, bonds’ long-term returns may be lower.

Stock market returns can be achieved in a short period of time, but mutual fund returns cannot be achieved in this manner.

2. Investing has a high cost

Mutual fund investors must pay fees such as expense ratios, exit loads, and other charges. Mutual fund management fees are included in these expense ratios.

You must pay an Annual Fee (AMC) on your trading account if you trade in the same stock market. On top of that, you’ll have to pay fees such as brokerage, STT, and stamp duty.

Stocks are cheaper than mutual funds despite all this, so it makes sense to invest there. Expense ratios are deducted from the long-term returns of your mutual fund. Stocks, on the other hand, appear more appealing in terms of investment cost.

 3. Monitoring or Tracking

The fund manager is in charge of a mutual fund. Based on their knowledge and skills, they continue to make adjustments to the Mutual Fund’s portfolio on a regular basis.

Despite this, the investor must set aside some time to stay current on information such as manager changes, post-restructuring, and dividends, amongst other things..

Investors can select Mutual Funds, such as Active Funds, Index Funds, and Debt Funds, based on their risk tolerance and investment objectives in Mutual Funds. All of these require different types of monitoring. Index funds and debt funds, for example, do not necessitate particular monitoring.

Investing in stocks, on the other hand, necessitates regular attention. You’ll need to verify financial data every quarter, watch the company’s profitability, and remain up to date on the company’s news in order to invest in stocks.

Stock investing necessitates a significant time commitment, whereas mutual funds can be monitored for as little as six months or once a year.

The amount of time required to invest in a certain stock or mutual fund should be taken into consideration when making an investment decision.

4. SIP’s ease of use

Only a disciplined investor can profit from the stock market. SIP (Systematic Investment Plan) is a mutual fund feature that allows you to invest a fixed amount each month, such as Rs 1000 or Rs 5000, into your mutual fund scheme.

SIP automates your investments, allowing you to develop wealth without any effort on your part.

On the other hand, the stock market does not allow for SIPs in any single stock. In order to acquire a share every month, you will need to order it yourself from your trading account.

SIP, on the other hand, can be accomplished by creating a pool of shares. The SIP of equities does not make sense due to the absence of adequate diversity.

5. Restrictions or diversification of asset classes

Investing in the stock market gives you access to a single asset type. Your money is solely used to purchase stock in this transaction.

Mutual Funds, on the other hand, allow you to diversify your investments. You can select from a variety of investment options, including equity mutual funds, debt mutual funds, hybrid funds, and balanced funds, to meet your needs.

6. It’s time to save money on taxes

Investments up to Rs 1.50 lakh in ELSS mutual funds are exempt from tax under section 80(c) of the Income Tax Act.

A mutual fund portfolio, as you may be aware, is made up of a slew of different companies. You will not have to pay capital gains tax if the fund manager also sells a stock during this time.

Capital gains tax is imposed when a stockholder sells a share in the stock market. You must pay STCG at 15% and LTCG at 10% of your net income. Investing in the stock market does not provide any tax advantages in this manner.

7. Investing Duration

You need to keep your mutual fund investments for an extended period of time if you want to see good returns. Ideally, you should hold your mutual fund investments for at least five years. Good results will not be achieved in a short amount of time.

In the case of stocks, this is not true. A week in the stock market can provide impressive returns. However, high gains come at the cost of significant risk.

8. Keeping an Eye on Your Money

Investing in the stock market gives you complete control over your money. You have complete control over what you buy, when you buy it, and how much you sell it. Stock market returns are entirely dependent on the skill and efficiency of the person managing the portfolio.

Mutual funds, on the other hand, provide you no influence over your investments. Investing in a mutual fund is all that is required of you.

The management of the mutual fund makes all of the purchasing and selling decisions. The fund manager of your mutual fund is the one person you can rely on. The return on your investment can be increased if your fund management is competent. However, if your manager is ineffective, your returns may also drop.

As a result, you must monitor your fund manager to see if he has joined any other investment vehicle outside your mutual fund.

The stock market is a fantastic alternative if you wish to buy and sell shares according to your own preferences. Mutual funds, on the other hand, are a good option if you only want your portfolio to be seen by an expert.

If you’re looking for an investment, check out: High-Yielding Investment Opportunities are listed below. Differences between the stock market and mutual funds in 2021 – A Brief

Conclusion

You can develop your own stock portfolio if you can analyse financial statements and do thorough research.

Stock market investing should not be left to a single specialist. In the stock market, you can’t rush your knowledge.

Stocks always carry a significant degree of risk. As a result, recall your risk-taking potential.

“Investors who can’t watch their equities fall 50% can’t enter the stock market,” says legendary investor Warren Buffett.

Finally, the stock market is a teaching tool for individuals who monitor their company’s success.

Mutual funds might be a suitable choice for individuals who don’t want to manage their own portfolios.

Mutual funds offer a wide choice of long-term investing options. If you’re a first-time investor, consider mutual funds before going public. You can start investing in the stock market later. A word of caution before investing in the stock market: get insider advice and learn everything you can about the company.