Most people want to invest in the share market but there are two ways to invest. The first is stocks and the second mutual funds.
To understand these two financial instruments you first need to understand the working of the financial market.
The financial market is the intermediaries between investors which helps companies to raise capital and funds to run their businesses successfully.
For investors, it provides a plethora of opportunities to save, earn returns, and also ensuring liquidity, when it is required to the investors. The financial market is acting as a driver of the growth of the economy in a country.
The money market, which indicates the short term instruments of the financial market, comprises various instruments like call/notice money, treasury bills, term money, certificate of deposits, commercial papers, etc.
The capital market of the financial market represents the long term instrument market, which encompasses Equity shares, preference shares, Debentures, long term bonds, etc.
Convertible debentures, warrants are the few medium-term instruments satisfying the needs of medium-term investors, ranging from three to five years.
11 Major Difference between Mutual funds Vs Stocks
The selection of the instrument depends upon the risk, return, growth, liquidity, tax reduction, and other various needs of the investors.
The most commonly invested avenues in the Indian capital market are stock and mutual funds. Even though apparently both appear similar but in reality, there are significant differences between these two, the details of which are discussed as follows:
Shares are issued by the company, to raise funds that represent ownership in the company. A group of consolidated shares becomes stocks, which is listed and traded on the stock exchanges like NSE, BSE, etc.
Several types of stocks that are traded on the exchange include Blue chip stocks (shares of reputed companies), Growth stocks (aimed at capital appreciation), Income stocks (in anticipation of regular dividend), overvalued and undervalued stocks, Cyclical (affected by economic cycles) and defensive stock (resistant to cyclical changes of the economy, etc.
Mutual funds are based on the concept of “Don’t put all eggs in one basket”. In mutual funds Investments are spread across industries, sectors, and instruments. Diversification is the unique nature of mutual funds.
Various mutual funds schemes that are issued in the capital market include open-ended scheme (tradable on NAV every day), close-ended scheme (non-tradable till the stipulation of the maturity period), Growth funds (invest in equities for capital appreciation), Income funds ( invests in fixed income bearing securities to generate regular returns), Money market funds (funds are invested in short term instruments), Tax savings scheme ( to exploit tax rebates), Index funds ( corpus invested in the specific index like (NSE index, BSE index), etc, catering to the need of diverse requirements of the investors.
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2. Asset class restriction and Ownership
Investment in a share or the stock represents ownership in that particular company. Your money is only invested in that particular company.
Whereas mutual funds, pools or mobilizes money from various sources and invest it on diverse instruments like shares, bonds, debentures, etc varying asset structures, which entitles to a proportionate share in the underlying securities. It offers a diversified portfolio of various assets, because of its large corpus to the investors.
3. Cost of investing
Opening a Demat account and trading account is essential to invest in the stock market. The charges for opening, annual account maintenance fees, transaction fees, etc, vary between brokers.
The Cost of investing in mutual funds is significantly high. The expenses incurred by the mutual funds are collectively called expenses ratio or entry load or sales load or front- end-load varies from 1.5% to 3 % of the average weekly net assets value of the scheme.
An index fund has the lowest expense ratio. Most of the index funds’ expense ratio is between 0.1% to 0.3%.
4. Numeric value
Shares have a definite numeric value and it is traded on the basis of the market value.
Mutual funds have NAV (Net Asset Values). Dividing the market value of the portfolio of the assets the fund that invested in less its liabilities by the number of units issued is the NAV per unit. It is the market price of the fund at which the company sells or investors buy from the mutual fund house.
5. Systematic Investment Plan and systematic withdrawal plan
Stocks do not offer a Systematic Investment Plan and systematic withdrawal plan, While mutual funds extend the feature of SIP. Systematic Investment Plan is nothing but, investing a fixed amount say Rs 1000, 2000, 5000 or 10000 according to your savings for a fixed tenure may be weekly, monthly or quarterly to acquire few units of the scheme.
Also at the time of disinvestment, it offers investors to withdraw a fixed or the variable amount from its units on a preset time may be weekly, monthly, quarterly, etc, which is a systematic withdrawal plan. These are useful for investors who cannot invest large funds at a time.
6. Control over the investment
Stock market vests the control to the investor over their investment. It is the decision of the investor to decide whether to buy, hold, or sell a particular stock.
Investors are required to be prudent by making thorough research before making investment decisions. And therefore, Investor plays an active role in this criterion.
The major advantage of mutual funds is professional services, which are offered for a small fee. Mutual funds are managed by the fund managers of the Asset Management Company. The fund manager takes the decision on the portfolio. Selection, investment, and disbursement of securities are taken care of by him and the investor has no role to play in this.
7. Ease of investment
Investment in stocks requires a Demat account (to store share certificates in the digital form) and trading account (to buy and sell shares), and fulfilling formalities takes time to place an order, diversifying the portfolio, and most important doing research to make the investment decision.
It requires hardly takes ten minutes or a little more to begin with investment in the mutual funds. Approaching a fund advisor or registering to internet platforms like Groww in, funds India, etc enables an investor to invest in the mutual funds without any hustle.
Related; Groww Mutual Funds Investing App Review and Comparison
8. Risk assessment
Stocks are slightly riskier as compared to the mutual funds, as the complete fund of investment goes to selected companies based on your research. Bullish or bearish signals of the company may widely fluctuate the value of the investment.
If your selected companies will perform well, you will generate returns otherwise you will lose your capital, as your investment is solely dependent on the performance of the particular selected companies for the investment.
Mutual funds are comparatively less risky as compared to stocks. As the funds get diversified into various sectors and instruments across industries, loss in one instrument can be offset by the return generated by the other instrument.
A stock’s track record can be assessed by using two tools. There are fundamental analysis and technical analysis.
Fundamental analysis attempts to measure the intrinsic value of a share. Share prices are forecasted using ratio analysis, accounting data, future plans of the company, discussions of the directors in the meeting, etc.
As the name itself suggests, it uses the fundamentals of the company to predict the future performance of the shares.
In mutual funds your money is managed by the fund manager of the Asset Management Company, it is essential to check the track record of the fund, before investing.
It has to be assessed by comparing the returns generated by the fund with the industries’ benchmark, competitor’s returns for the longer period, to know the efficiency of the Mutual funds in the allocation and managing the fund resources.
Also, it is very important to check whether the senior fund manager of the mutual funds is changed recently. If yes, then check what is the performance of new fund manager after holding his post.
10. Taxation and tax benefits
Share that is traded on the stock exchange attracts Security Transaction Tax (STT), applied only when you buy and sell shares. Currently, it is 0.1% of the shares buy/sell amount.
As per provisions of the budget made in 2018, gain on the share which is held for a period of fewer than 12 months is the short term capital gains earned by the investor, which is eligible for 15% on the gains.
(For your reference, Gain = Selling price – Purchase price).
If an investor earns gains on the share, that is held for a period of more than twelve months, it is long term capital gains. If an investor earns more than Rs 1,00,000 as long term gains on the shares listed on the stock exchange, then it is taxable at 10%.
The dividend received on the share by the investor, in excess of Rs 10 lakh is taxable at 10%.
In the case of mutual funds, there are various schemes, which offer tax benefits to investors like UTI long term tax savings fund, Principal tax savings fund, etc. However, apart from the tax-saving scheme, other schemes are taxed similarly as in the case of shares.
Short term gains are taxed at 15% and long term gains are taxed at 10%. Also, dividends distributed are taxed at 10% (Tax deducted at source) by the fund house, in excess of Rs 5,000.
11. Growth Trajectory
Stocks are suitable for investors expecting higher returns in the long run by making an investment decision on their own.
Normally, mutual funds generates good returns for medium/ long term investors ranging from five to seven years.
Stocks also offer a higher return in the short run for the prudent active investor, whereas mutual funds offer steady returns in the medium and long term, catering to the needs of the passive investor.
The selection of investment in stock or mutual funds depends upon the risk appetite, funds availability, and expertise of the market and needs of the investors.
So, which financial instrument are you going to choose? Stocks or Mutual funds!
Comment below if you have any doubt.