Mutual funds VS Stocks: Which is a Better Investment

Investors often ponder on whether they should invest in stocks directly, or invest in mutual funds. Well, let’s deep dive into both and understand it better.

First, we’ll understand all about Mutual Funds.

What are Mutual Funds:

The idea behind a mutual fund is simply money collected in one place from various individual investors with same or similar financial objectives and goals. This money is invested further into securities like shares, bonds and so on, depending upon the category of mutual fund.

Mutual funds are managed by a Fund Manager who has the expertise and skills to generate high returns. The Fund Manager is backed by a research team which aids him in taking decisions of buying/holding/selling of securities.

When one invests in a Mutual Fund, they do not need large sums of money and can even start with a small investment of ₹500.

Investing in mutual funds is recommended for investors who:

• Want to convert their savings into wealth but do not have the desire or time to research about the market continuously
• Are investing for the first time and need a safe place to park their funds

Mutual Funds are a great way to diversify your portfolio. Depending upon the category of mutual fund, investors can get exposure to different asset classes like stock, bonds, gold etc.

Investors can get access to a variety of mutual fund schemes and the right guidance from experienced professionals at Prabhudas Lilladher. To invest in mutual funds with PL, click here

A few things to keep in mind when it comes to investing in mutual funds:

• It is advisable to hold the investment for a period of 18-24 months so as to get a substantial return on the investment.
• The fees and expenses charged by the mutual fund to manage a scheme are regulated by the Securities Exchange Board of India (SEBI).
• Taxes depend on the type of asset class the mutual fund scheme invests in. If it is a Mutual fund investing more than 65% in Equity, then short term gain are gains earned from investments held for less than 1 year and long term gains are gains earned from investments held for more than 1 year. The rate for short term is 15% and long term is 10%. Long term capital gains on Equity MF up to ₹1 Lakh is totally tax free.

Understanding equity investments:

Now, let’s look at stocks and understand more about how direct equity investing works.

Stocks are also known as equity. When a person purchases a stock, they own a fraction of the organisation relative to the number of stocks they bought and the number of the stocks the company is selling. For example, if a company has a total of 1000 stocks and an investor buys 100 of them, then they would have a 10% ownership in that particular company.

Note that with stocks, investors are only linked to the company they buys stocks of. Therefore, if they hold stocks of 1 company, then they have stake only in that company. Most of the research work and the decisions of buying/holding/selling are taken by the individual themselves or by a stock broker chosen by the investor.

As a shareholder, the investors have a right over the profits earned by the company. The company may pay this in the form of dividends when its financial conditions permit it to do so. Some stocks also give the stockholder voting rights on matters like election of board of directors and dividend payouts.

A few things to keep in mind when investing in stocks directly:

• There is no such thing as minimum investment amount. An investor can invest in the stock market depending on their liquidity and risk appetite.
• There is no particular period of holding for stocks.
• The stock performance is dependent on multiple factors including the company’s own performance, sectors performance and macro factors.
• When long term capital gain (gains made from holding the stocks for more than 1 year) exceeds ₹1 lakh after sale of stock, it will have a long term capital gain tax of 10%.
• Investors can earn from stocks in two ways. One is through the dividend given out by the company and the other is when the stocks are sold to the stock market for a price higher than the price they were bought at.

If you are looking to invest in the stock market, then you can open a Demat & Trading account with PL by clicking here. PL provides in-depth research reports and calls, event updates and other thematic research to its clients, which helps them make informed investment decisions in their wealth creation journey.

To better understand which investment to choose, let’s highlight the characteristics of each:

Therefore, from the above information it is clear that mutual funds and direct equity investments are very different from each other and each have their own objective and way of working.

There is no correct answer about which one to invest in. It depends on the risk appetite and willingness to take that risk, financial objectives and stock market knowledge of the individual.

Whether you wish to invest in direct equity, mutual funds or any other form of investment, you can do so through PL’s comprehensive wealth basket. Click here to open a demat account with PL.