Most of us who have not yet been savvy with the investment world often get confused between stocks and Mutual funds. There is a fundamental difference in both the entities which belong to the same parent industry; trading. Before jumping on to difference, let us try and understand what these terms actually mean.
Investing in the Stock Market
This kind of investment involves directly investing in the stocks of a company. You purchase stocks of the companies listed on stock exchange expecting profits as the stock of the company(s) goes up.
Investing in Mutual Fund
This is an indirect kind of investing wherein the investor invests in the funds raised by different fund houses. A mutual fund is a group investment where the fund houses pool the total investments by investors to purchase stocks, bonds and FD securities in large numbers. The is a dedicated fund manager looking after the funds purchased and the investor’s stake as well. Hence, unlike stock, in mutual funds, the investor is directly linked with the gains and losses of the fund’s portfolio.
Moving ahead, let us look at 6 fundamental differences between Mutual Fund and Stock Investing;
Investing in direct stocks involves a lot of volatility as compared to investing in mutual funds. Portfolio diversification is the answer to this. When you invest in mutual funds, you are investing in a mixed bad of securities like FDs, Bonds, stocks etc. which can average out the risks on a combined note. Whereas when you invest in stocks, you are directly buying the shares of a company which if goes up, it’s a direct gain and if unfortunately goes down, is a direct huge loss.
2. RISKS AND RETURNS
There is no denying the fact that returns are exponential while investing in the stock market. Many big names like Rakesh Jhunjhunwala, Warren Buffet etc. have made most of their wealth out of stock market trading. But this is only the silver side, there is a many-fold bigger list of people who have incurred great losses while trading in the stock market. Although the returns are quite high, the risks or losses are also of the same level.
While, if you look at mutual funds, most of the ranked mutual funds have performed consistently over the years providing with decent returns. Although the returns, if compared to stocks, are not as high but stand enough for decent wealth creation over the period.
3. TAX IMPLICATIONS
Whenever you happen to sell out stocks, you are bound to pay taxes no matter what. Stocks provide with zero tax benefits to the investors. A huge tax is bagged away from you ranging from 10-15% depending upon the gains.
There is a 15% tax applicable on short-term capital gains and 10% (for gain above 1 lakh) on long-term capital gains.
Whereas, if you happen to invest in tax saving schemes like ELSS under the mutual fund’s bucket, it comes up with tax deductions on up to Rs. 1.5 Lakh invested in a year falling under the Income Tax Act, Section 80C.
Moreover, for as long as you are invested in the fund, you need not pay any taxes if the fund happens to sell any stock from the portfolio.
4. MARKET MONITORING
Investing in the stock market is a time-consuming task. It requires your dedicated attention and a lot of time to keep a watch on the market trends and fluctuations. You do not have the option of any help or aid while investing in stocks. Moreover, since the market is quite volatile, you have to keep up with the frequency of monitoring the market.
Oppositely, when it comes to mutual funds, you have expert professionals called fund managers who do the monitoring thing for you. The fund manager takes decisions on your behalf regarding selling and purchasing of funds of course with the investor’s consent. Although you are not required to keep a watch on the market, off and on it will be advisable to do so just to keep a track of your fund’s performance.
5. SYSTEMATIC INVESTMENTS
Mutual funds come with an excellent method of investment called SIP or Systematic investment plan which is a smart solution for people with busy lives and have multiple things on their list. SIP allows you to make pre-fixed investments within determined intervals. It makes investing disciplined and automated.
Stocks do not have any such option. You have to remember and pay.
With the stock investment, the only option available is to invest in stocks.
Whereas mutual funds come with a variety of options like bonds, funds, stocks, debt-funds, equity-funds, hybrid funds etc. you can diversify your portfolio to great extent making the risk factor negligible over time.
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