What Is The Difference Between Mutual Funds And Share Market?
Investors in India have always considered the stock market as an investment avenue to grow their money. In order to achieve wealth maximization, it is important to invest one’s savings into different assets that offer higher returns and reduce risk. Without risk, there are no returns. So whenever you are looking at different investment options, you will be required to choose them based on your risk-taking ability and the tenure you wish to invest for.
The major differences between investing in mutual funds vs investing in stocks are in case of diversity vs concentration, ease of investment, self-management vs professional management, cost of investments, mode of investing, risk factors, and taxes applicable.
Individual investors in India hold a huge investment into equity where the risk-reward ratio is high. When it comes to investing in stocks, you will be required to carry out your own research. You will have to study the financial statements of the company and analyze the risk and return ratio. Based on your knowledge and information, you will have to choose companies to invest in and make the investment through a demat account.
On the other hand, investing in stocks through mutual funds is an option where you offload your responsibility of picking a stock and allocating your funds to a professional mutual fund manager. The mutual fund industry is growing and a number of investors are looking for the security of their investment in the same. The primary benefits of investing in mutual funds over stocks are discussed below:
- Diversification benefit of mutual funds
- Ease of investment in mutual funds
- Tax advantage offered by ELSS funds
- Lower cost of investment in mutual funds
- Lower risks associated with mutual funds
- Benefits of Systematic Investment Plan (SIP)
- Tenure of investing in mutual funds vs stocks
Now let’s talk about the seven above mentioned points in slightly more detail:
1. Diversification benefit of mutual funds
Mutual funds are known to provide diversification in your portfolio. With an investment in different securities across various sectors, the funds ensure that the overall risk of the portfolio is minimal.
2. Ease of investment in mutual funds
Mutual fund investments are managed by fund managers who have a thorough knowledge of the market. They invest on your behalf and ensure that the investment generates high returns for you in the long run. As mentioned earlier, if you invest in mutual funds, you will not have to carry out research or track the portfolio and book profits on your own. Everything will be taken care of by the fund managers.
3. Tax advantage offered by ELSS funds
Many mutual funds allow you to claim tax deductions on your salary. These mutual funds are called as ELSS funds, and they allow you to save upto ₹1.5L per assessment year. Investing in stocks does not offer any such benefits.
4. Lower cost of investment in mutual funds
In case of sale and purchase of shares, a brokerage is charged on every transaction. However, mutual fund investment has a lower cost; the fund houses negotiate the charges and ensure that the transaction cost is reduced.
5. Lower risks associated with mutual funds
By making an investment in a number of sectors, the overall risk of the portfolio reduces. With stocks, the risk associated with every investment remains the same since the market volatility will have an impact on the performance of every share.
6. Benefits of Systematic Investment Plan (SIP)
Another advantage of investing through a mutual fund is the ability to invest through an SIP. You may bring financial discipline in your life by setting up an SIP. Not only will it reduce your financial burden, but it will also ensure regular investments into the fund instead of investing in a lump sum. You may invest in mutual funds and purchase the stocks with varying Net Asset Values (NAVs). This also brings down the cost of purchase and reduces the impact of market volatility.
7. Tenure of investing in mutual funds vs stocks
When investing in stocks, you will have to constantly keep a track of your investment in order to time your move. You need to make sure that you enter and exit the investment at the right time in order to gain maximum benefits. In case of mutual fund investment, it is made with a particular tenure in mind. This allows your fund to grow and you will not be tempted to exit the market when it is highly volatile.
No investment is risk-free. The risk may be mitigated in mutual funds but it may not be completely eliminated. The ups and downs in the market have an impact on both the investment avenues, but the same is lesser in case of mutual funds due to the impact of diversification. As an investor, you need to consider your long-term financial goals and your current financial condition before making an investment decision. Weigh the options and invest in funds that suit your requirements. Consider the long-term returns in case of the investment option you choose and plan your investment accordingly.
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