When it comes to investing in mutual funds or shares, many investors tend to consider stocks as a riskier option when compared to mutual funds. Mutual fund investment thrives in volatility. When one decides to invest in mutual funds, their portfolio comprises various sectors and industries.
The stock market requires an investor to conduct extensive research and analysis before investing their capital. The share market today allows investors to seek help from the guidance given on the exchange. There is a list of stocks shared under ‘stocks to buy today,’ which makes those stocks a must-buy commodity on that day. On the other hand, mutual fund investments are led by fund managers. They charge annual management fees for their research and services.
Let us understand how mutual funds or shares’ fundamentals work. This can be done by learning about the key differences between the two investment avenues.
For a new investor:
- Investors just starting their investing journey with a basic knowledge base are advised to begin with mutual fund investments.
- While you invest in mutual funds, your entire portfolio is handled by a fund manager so the risk is comparatively lower.
- You can actually sit with an expert and decide which plan to opt for as per your risk-taking capability.
You can choose to invest your capital in index funds or ETFs if a passive investment is what you seek. They work in such a way that their core method of functioning is to track indexes and provide returns matching the index. You are benefited from a low expense ratio in comparison with actively managed funds.
The pace of tracking investments:
- For mutual funds, fund managers are well equipped with experience and long-standing expertise in the field. They take care of everything – right from learning if the stock is picking up to monitoring and making fund allocations to them.
- If you choose to trade in shares, you are held responsible and accountable for tracking actions.
Handling of risks and returns:
- A key difference between mutual funds and shares is that in the case of shares, the performance of one stock cannot make up for another stock’s low performance in the portfolio.
- However, while investing in mutual funds, and specifically equity-backed mutual funds, there is a greater advantage of lowering the risk with the help of portfolio diversification.
Tax advantages:
- Another factor drawing investors towards mutual funds is tax benefits. Investment in stocks does not provide you with tax benefits. However, an investor becomes eligible for claiming a tax deduction up to the limit of Rs. 1.5 lakh per annum if an investment is made in Equity Linked Saving Schemes (ELSS).
- This is covered under section 80C of the Act. It helps with twin benefits such as tax savings and inflation-bearing returns.
As you understand the above factors, you get an idea about the control of your investments; it is higher in the case of shares as it is managed solely by you. If you look at the cost of investment, mutual fund investment can be a minimal monthly payment depending on the plan. Hence, you must determine long-term financial goals. Investors make huge profits if they invest in well-researched stocks with a buy-and-hold strategy. The idea is to understand what works best for you and arrive at a decision.
