If you are also thinking or planning to invest. Here we are going to discuss the difference between stocks and mutual fund. I hope it is going to be helpful for you.
Stocks or Mutual Funds
It is the most common question in the mind of new invester. Let’s first understand what stocks and mutual funds are.
What are Stocks?
Stocks are shares of a company that you can buy. When you buy a stock, you own a small part of that company. People invest in stocks to earn money through rising prices (capital growth), dividends (profit sharing), and to have a say in company decisions
What are Mutual Funds?
Mutual funds collect money from many investors and invest it in various things like stocks, bonds (debt), or even gold. These funds are managed by professional fund managers. There are different types of mutual funds like
- Equity Funds – invest mostly in stocks
- Debt Funds – invest in fixed income instruments
- Hybrid Funds – mix of equity and debt
There are also special funds for retirement, children’s goals, and passive options like index funds and ETFs.
Stocks or Mutual Funds: What Should You Choose?
While both allow you to invest in stocks, mutual funds may be the better choice for most people. Here are 7 reasons why:
1. Diversification (Spreading Risk)
Mutual funds invest in many different stocks – sometimes 50 or more – so your risk is spread out. If one stock performs badly, the impact is small.
Most individual investors only hold 10–15 stocks, which means more risk and higher ups and downs. To match the variety in mutual funds, you’d need a lot of money. For example, buying one share of each NIFTY 50 company can cost over ₹1 lakh.
But with mutual funds, you can start with just ₹500 and still own a small part of many companies.
2. Expert Management
Mutual funds are managed by experts who study the markets, companies, and the economy before making investment decisions. They follow strict rules to reduce risk.
If you invest in stocks directly, you’ll need to do all the research yourself – understand businesses, financials, and economic trends. That takes a lot of time and knowledge, which may be hard for beginners.
3. Lower Costs
Mutual funds benefit from buying and selling in large amounts, which reduces their costs. Also, if you invest through direct plans, you avoid commissions and pay lower fees.
For example, Kotak Flexicap charges 1.49% in a regular plan but only 0.64% in a direct plan. That 0.85% difference adds up over time and gives better returns.
If you buy stocks yourself, you’ll pay fees like brokerage, taxes, and other charges. While they’re not very high unless you trade often, they can still add up.
4. More Choices
Mutual funds come in many types to match your goals and risk levels:
- Conservative investors can pick debt funds or large-cap equity funds.
- Aggressive investors can go for small-cap or sector funds.
- Short-term goals (1–5 months): liquid funds
- Medium-term (around 3 years): short-term bond funds
In contrast, with stocks, you’re only investing in companies. There are many companies (5,000+), but only around 500 are actually worth investing in.
5. Discipline in Investing
Mutual funds allow SIPs (Systematic Investment Plans), which let you invest small amounts regularly – as low as ₹500 per month. This builds a habit of saving and investing over time.
Some brokers offer SIPs in stocks too, but stock prices vary, and choosing the right ones is harder.
6. Tax Benefits
Mutual funds and stocks have similar tax rules when it comes to capital gains.
But ELSS mutual funds (Equity Linked Savings Schemes) give tax benefits under Section 80C, where you can save tax on up to ₹1.5 lakh invested in a year. Stocks don’t offer this.
Also, when mutual fund managers buy/sell stocks within the fund, you don’t pay tax. But if you sell your own stocks, you’ll be taxed based on how long you held them.
7. Returns and Risk
Mutual funds aim to give steady returns with less risk because they are diversified.
Stocks can give very high returns, but they are also more risky. This is why experienced or wealthy investors sometimes prefer stocks. But for new investors, the ups and downs of the stock market can be stressful.
Conclusion
If you have experience, enjoy research, and can handle the ups and downs of the stock market, you can consider investing in individual stocks directly. But remember, big gains also come with big risks.
As John Bogle (creator of index funds) said:
“If you can’t handle losing 20% in the stock market, don’t invest in stocks.”
If you prefer a safer, more guided path and want your money managed by experts, then mutual funds are a better choice. They offer many options, are easier to manage, and help you reach your financial goals with more consistency.
For beginners, it’s smart to start with mutual funds. Once you gain confidence, you can explore stock investing.
Disclaimer:
This article is for informational purposes only and does not constitute financial, investment, or legal advice. Readers are encouraged to do their own research and consult a qualified financial advisor before making any investment decisions.
FAQ
- What is the main difference between stocks and mutual funds?
Stocks represent ownership in a single company, while mutual funds pool money from many investors to invest in a diversified portfolio. - Which is riskier: stocks or mutual funds?
Stocks are generally riskier due to lack of diversification, while mutual funds offer reduced risk through diversification. - Are mutual funds better for beginners?
Yes, mutual funds are often recommended for beginners due to professional management and built-in diversification. - Can I lose money in mutual funds?
Yes, mutual funds are subject to market risk and can lose value, but the risk is typically lower than individual stocks. - Do stocks offer higher returns than mutual funds?
Stocks have the potential for higher returns but also come with higher risk compared to mutual funds. - Which investment is better for long-term goals?
Both can work for long-term goals, but mutual funds may be more stable and suitable for passive investors. - Is it easier to buy stocks or mutual funds?
Both are easy to buy online, but mutual funds often have fewer decisions to make since they’re managed by professionals. - Are there tax differences between stocks and mutual funds?
Yes, taxes on mutual fund distributions and capital gains can be more complex than with individual stocks. - Can I invest in both stocks and mutual funds?
Absolutely. Many investors use a mix of both for diversification and growth. - How much money do I need to start investing?
You can start investing in mutual funds with as little as $100, while stock purchases may require more depending on the price per share.