Learn the key difference between stocks and mutual funds in this article. Understand the risks and returns associated with each and choose the one that is right for you.
EXPLORE FUNDS
Mutual Funds vs. Stocks
EXPLORE FUNDS
4 mins read
22 Feb 2024
Investing in financial instruments is a common avenue for individuals to grow their wealth and achieve their financial goals. Two popular options that often come into consideration are mutual funds and shares (also known as stocks). Both offer opportunities for potential growth and returns, but they differ in various aspects, including their structure, risk profile, and investment strategies.Mutual funds vs stocks – Let usexplore the difference between stocks and mutual funds, how to invest in them, and tips for making informed investment decisions.
What are mutual funds?
Mutual funds are a type of investment vehicle that pool money from a group of investors and invest it in a variety of assets, such as stocks, bonds, and money market instruments. This allows investors to diversify their risk and achieve their financial goals easily. Investors own the units allotted to them by the mutual and do not have ownership of underlying assets. Bajaj Finserv Platform is a leading mutual fund investment platform in India that makes it easy to invest in mutual funds.
Pros and cons of mutual funds
Mutual funds offer diversification and professional management but come with fees and potential for lower returns. Let us explore the advantages and disadvantages of mutual funds in detail:
Pros:
- Diversification: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities, reducing individual investor risk.
- Professional management: Mutual funds are managed by experiencedfund managers who make investment decisions on behalf of investors, leveraging their expertise and research capabilities.
- Accessibility: Mutual funds offer accessibility to investors with varying investment amounts, allowing even small investors to participate in diversified investment opportunities.
- Liquidity: Mutual fund units are bought and sold based on their net asset value (NAV), providing investors with liquidity as they can redeem their units anytime, subject to market conditions.
- Convenience: Mutual funds offer convenience through features like systematic investment plans (SIPs) and systematic withdrawal plans (SWPs), enabling investors to automate their investment and redemption processes.
Cons:
- Fees and expenses: Mutual funds charge fees and expenses, including management fees, administrative costs, and sales charges, which can erode overall returns over time.
- Lack of control: Investors in mutual funds delegate investment decisions to fund managers, relinquishing control over individual investment choices and timing of transactions.
- Market risk: Mutual funds are subject to market risk, and fluctuations in market conditions can impact the value of the fund's underlying investments, leading to potential losses for investors.
- Overdiversification: While diversification is a key advantage of mutual funds, overdiversification can dilute returns and limit the potential for significant gains, especially in high-performing sectors or stocks.
- Tax implications: Mutual fund investments may be subject to capital gains tax, dividend distribution tax, and other taxes, depending on the type of fund and the investor's holding period, potentially reducing overall returns.
Understanding these pros and cons can help investors make informed decisions about whether mutual funds align with their investment goals, risk tolerance, and financial objectives.
What are stocks?
Stocks (also known as equity) represent ownership in a corporation/company. When you buy a stock, you acquire a share or partial ownership in that company. These shares entitle you to a proportionate claim on the company’s assets and earnings. There are two main types of stocks: common and preferred. Common stockholders have voting rights and may receive dividends. Preferred stockholders typically receive fixed dividends but have limited voting rights. Historically, stocks have outperformed most other investments over the long run, making them a fundamental part of many investors’ portfolios.
Pros and cons of stocks
Pros:
- Potential for high returns: Stocks offer the potential for high returns over the long term, especially in growing companies or emerging sectors.
- Ownership stake: Investing in stocks provides shareholders with partial ownership of the company, entitling them to voting rights and a share of company profits through dividends.
- Liquidity: Stocks are highly liquid assets, allowing investors to buy and sell shares relatively quickly on public stock exchanges.
- Diversification opportunities: Investors can diversify their portfolios by investing in a variety of stocks across different industries, regions, and market capitalisations.
- Hedge against inflation: Stocks have historically provided a hedge against inflation, as companies can adjust prices for goods and services to reflect rising costs.
Cons:
- Volatility: Stocks are subject to price fluctuations and market volatility, which can result in significant short-term losses and fluctuations in portfolio value.
- Risk of loss: Investing in stocks carries the risk of partial or total loss of invested capital, especially in the case of bankruptcy or poor company performance.
- Lack of control: Shareholders have limited control over company decisions and management actions, as major decisions are often made by company executives and boards of directors.
- Emotional investing: Stock market fluctuations and media hype can lead to emotional investing decisions, such as panic selling during market downturns or overconfidence during bull markets.
- Research and due diligence: Successful stock investing requires thorough research, analysis, and due diligence to identify quality companies, understand market trends, and make informed investment decisions.
Mutual funds vs stocks – Key differences
Feature | Mutual Funds | Shares |
Investment vehicle | Pooled investment | Individual investment |
Management | Managed by professional fund managers | Managed by the investor |
Diversification | Offers diversification across assets | Concentrated exposure to a single company |
Risk | Generally lower risk due to diversification across assets | Higher risk due to specific concentration |
Investment Strategy | Varies (Equity, Debt, Hybrid, etc.) | Investment in company's growth potential |
Liquidity | Usually, higher liquidity | Liquidity depends on the trading volume |
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Frequently asked questions
Which is safer, mutual fund or shares?
Mutual funds and stocks offer distinct risk profiles. Mutual funds provide diversification and professional management, reducing risk compared to direct stock investments. However, there's no guarantee, and market fluctuations can affect fund values.
What are the different types of shares?
Common shares, also known as equity shares, and preference shares are the two primary types.
What is the difference between shares and mutual funds?
Shares represent ownership in a single company, while mutual funds pool money from multiple investors to invest in a diversified portfolio of assets, which may include shares, bonds, and other securities.
What exactly do you mean by "mutual funds"?
Mutual funds are investment vehicles where funds from multiple investors are pooled and managed by professional fund managers. These funds invest in various assets like stocks, bonds, or other securities, providing diversification and convenience to investors.
What exactly do you mean by "shares"?
Shares, also known as stocks or equities, represent ownership in a company. When you own shares of a company, you become a shareholder and may have rights like voting in company matters and receiving dividends.
Are Mutual Funds affected by the stock market?
Yes, Mutual Funds can be influenced by stock market movements since they invest in stocks, bonds, and other securities. Changes in the stock market can impact the overall value of the mutual fund's portfolio.
Mutual funds or stocks—which one offers more security?
Mutual funds typically offer more security compared to individual stocks because they spread investments across various assets, reducing the impact of market fluctuations. However, the level of security depends on the specific mutual fund or stock chosen.
What makes SIP a better investment than stocks?
SIPs (Systematic Investment Plans) are favored over individual stocks for many investors due to their ability to spread investments over time, reduce the risk of market timing, promote disciplined investing, and offer the potential for rupee-cost averaging.
Mutual funds vs stocks - Which is better?
Mutual fundsoffer diversification, professional management, and lower costs. Stockscan be riskier but potentially deliver higher returns. For most investors, a diversified portfolio with both mutual funds and stocks is a balanced approach.
Why choose stocks over mutual funds?
Stocksallow direct ownership in companies. Investors can participate in company decisions and benefit from individual stock performance. However, stocks are more volatile and require research and expertise.
Is it wise to invest in stocks?
Yes, but with caution. Stocks offer growth potential, dividends, and long-term returns. Understand the risks, diversify, and invest for the long term.
Should I invest in 100% stocks?
Consider your risk tolerance and time horizon. While 100% stocks may offer high returns, it is risky during market downturns. Diversification with a mix of assets is often a better strategy.
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Disclaimer
Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registeredwith the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).
BFL does NOT:
(i)provide investment advisory services in any manner or form;
(ii)perform risk profiling of the investor;
(iii)carry customized/personalized suitability assessment;
(iv)carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.
In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.
Bajaj Finserv Direct Limited, (“BFDL”), a wholly owned subsidiary of Bajaj Finserv Limited (is a Registered with SEBI as an Investment Advisor with Registration no. INA000016083). BFDL enables resident Indian customers to directly invest in third party mutual funds through its online platform. BFDL entered into a referral arrangement with BFL, whereunder, BFL may, without risk or responsibility on its part, refer the resident Indian customers who are interested in placing their investments in Direct Mutual Funds through BFDL online platform. Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.
Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing
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