Mutual Funds Vs. Stocks – Which Investment is Beneficial?
To accomplish your personal financial goals, it is paramount that you invest regularly and steadily move towards the goal. Just as it is vital to invest regularly, it is equally important to choose the right investment tool. You can also choose to invest directly in stocks or invest in markets through mutual funds. If you are in a dilemma of investing in mutual funds vs stocks, this article will help you in your decision-making process.
Here is a comparison between the two on different consideration parameters:
Familiarity with Stock Markets
Investing directly in equity markets through stocks requires you to research about the company, the sector that the company operates in, its growth prospects and the company valuation. On the other hand, mutual funds render professional fund management to the money invested, wherein a team of research analysts and extensive research back the investment decisions of the fund managers. As such, it is always advisable that if you are a first-time investor, you must invest through mutual funds.
Tracking Investment Portfolio
Investing in the money market is only the first step towards achieving your financial goals. You must regularly review the progress. When you invest in stocks, you must review the performance of the funds frequently as the dynamics of the company, as well as the sector, may change significantly due to regulatory or statutory changes, etc. On the other hand, your fund house may be taking such necessary review for the stocks in their portfolio on your behalf. As such, the portfolio review for mutual funds is required only at extended intervals, to check the performance of MF schemes and to eliminate the underperforming schemes, if any.
If you invest in stocks, you are not only exposed to the risk of equity investing but also the company risks. On the other hand, mutual funds provide you a wide range of mutual fund schemes to invest across asset classes. The proportion of different asset classes like equity, debt, gold etc. in an investment portfolio is referred to as asset allocation. With mutual funds, you can invest in equity schemes, debt schemes, hybrid schemes, etc. to align your risk profile with your desired asset allocation strategy.
Risk Bearing Ability
Equity investing is always associated with an aggressive investing strategy and suitable for investing with a high-risk appetite. A stock price may move wildly over a short period, depending upon various factors including changes in the macroeconomic environment. While mutual funds may also be invested in stocks and may reflect volatile movements, the investment portfolio tends to be diversified with investment in different companies and types of asset classes.
Further, different mutual funds schemes can cater to investors with varying profiles of risk like aggressive, moderate, conservative etc. For example, a conservative investor, who prefers stability in the portfolio, may choose to invest in debt funds. In contrast, an investor with a moderate risk profile may want to invest in hybrid funds, which invest in equity and debt instruments simultaneously.
Investing directly in stocks may not provide you with any tax benefits at the time of investment. However, investing in a specific category of mutual funds, namely Equity Linked Savings Scheme (ELSS), can make you eligible for a tax benefit of up to Rs. 1.50 lakhs under Section 80C. You may also note that tax benefits under Section 80C are not available from the financial year 2020-21 if you opt for the reduced tax rates and forego the specified tax benefits, as proposed in the Union Budget 2020.
Investors tend to invest in the stocks directly in anticipation of their stock price targets over the short term as well as long term. However, when such targets are achieved, the investors may liquidate their investments or switch their investments from one stock to another. On the other hand, mutual fund investments are not likely to be initiated from such stock-specific triggers, and instead, such transactions may be pushed in pursuit of the financial goals.
So, now that we have discussed the comparison of mutual funds vs. shares, it would have got a bit easier for you to make an informed investment decision. Keep investing and stay invested.
Note: The tax benefits as mentioned in the article are for illustrative purposes only, and are updated as per Union Budget 2020 presented by the Govt. on 1st Feb. 2020. Contact your tax advisor for more details.