Mutual Funds or Stocks? What’s your Pick?

Thinking of Investing in the Market? Confused where to put in all your Money? Most Investors would consider investing directly into stocks because they think that they know the game and can beat the Market. The potential excess returns on Stocks proves to be the Cherry on Top (Only in the Minds of the Investor though).

Both the avenues have a vast difference between them though including the amount of time and efforts you’ll need to dedicate towards it. What are the Major Differences between Stocks and Mutual Funds?

Knowledge and Expertise

The Level of Knowledge and Expertise is quite advanced in terms of Stocks. For New Investors, the adrenaline rush is so high that they feel that they can correctly predict the movement of stocks. Little do they understand that even people playing this game for over 50 years also fail to do this. Stocks aren’t an easy pick. Especially for New Investors.

If you feel that you can dedicate the time and effort required to analyse the Annual Reports, Balance Sheets and other Financials, you might as well start Looking into the Annual Reports of companies. Else, Mutual funds pose a good place to start your investment journey.

Control over your Portfolio

As obvious as it might get, you will have Limited Control over the Stocks invested in by Mutual Funds because that is decided by the Portfolio Manager. The only control you’ll have is the type of Mutual Fund you invest in because that will determine what “type” of Stocks the Fund invests in.

On the Contraty, investing directly in Stocks will give you Full Control over the Stocks you pick. You are your own Portfolio Manager and you have the exclusive choice of investing in whichever stock you like based on your Research, Analysis, or Liking (Which isn’t a great basis though).

A Professional would be doing this job for you if you opt out for Mutual Funds.

Volatility

A typical Mutual Fund invests in around 100 different Companies. That does surely reduce the Volatility of your Investment. Compared to Individual Investing, the Volatility depends much on the Diversification. A portfolio of 15-20 Companies would be considered Diversified and would help in reducing volatility as well.

The volatility is mainly dependent on the choice of the Individual Investor.

Fees and Commission

Equity fees can add up to a huge amount if you want to trade Stocks on a regular basis.

Although new discount brokerage firms such as Zerodha, Upstox and 5paisa are offering equity delivery for as low as Rs. 20 per trade. This poses an attractive incentive to start investing.

On the other hand, Mutual Funds charge something which is known as Expense Ratio. You can transact Mutual Funds without having a demat account as well.

Exemptions

Gains from Stocks cashed within the first 12 months are subject to Tax at 15% under Short term capital gains. Whereas, if you invest in ELSS (Equity Linked Savings Scheme) Funds, you are eligible for deduction under Section 80(C).

SIP

Whenever opting for Mutual Funds, you can always invest in a Systematic Investment Plan (SIP), which helps you accumulate wealth over time. The monthly payments made by you are invested into Mutual Funds and compounding also plays a key rolee.

No such instruments are available for Equity Shares and also, thinking to yourself that you’ll invest a fixed amount monthly into Stocks doesn’t help much either because seldom is anyone so consistent.

Involvement

The involvement in case of Mutual Funds is very limited. This is typically for those who do not have any time and expertise in this matter. Once you invest in Mutual Funds, you won’t have much to do unless you want to withdraw some of your investments. The Fund Manager and a dedicated team of Analysts together decide which Stocks to invest in and which to sell.

If you choose to invest in Stocks directly instead, the Hard Work will all be on you. You will be actively involved in the buying and selling of stocks and maintaining your portfolio. If you have time on your hand, and you are willing to go through the hard work, this should be your pick.

Before you choose where to put your Money, make sure to keep these points in mind before making your decision. Good Decisions will make you Good Money.

Stay Tuned for further updates on How to choose the right stock? and How to analyse Annual Reports.