Investors are often confused between the right investment option for their portfolio. Where should you invest? Mutual funds or stocks? Both the investment options have the potential to generate significant returns. Let’s understand the differences between the two types of investment to help you make that decision.
Reasons to choose mutual funds over stocks
Following are four major reasons why you must consider investing in mutual funds over stocks:
- Professional management
One of the key reasons to invest in mutual funds is the professional management it offers to investors. Mutual fund investments are professionally managed by fund managers who are skilled experts having abundant of knowledge and understanding of the markets.
Contrary to that, investing in stocks requires ample of research and prior experience or knowledge. Hence, mutual funds can serve as a boon to investors new to the investing world.
- Save tax on mutual fund
An investor can enjoy several tax benefits on mutual funds. One of the major tax benefits is tax deduction under Section 80C of the Income Tax Act, 1961. Investment in ELSS mutual funds provide investors with tax deduction of up to Rs 1.5 lac per annum u/s 80C. As a result, an investor can save up to Rs 46,800 per annum by investing in Section 80C tax-saving investments.
However, no such provision is available under direct stock investment. If you invest in stocks, you’d be levied with charges such as capital gains tax, STT (securities transaction tax), brokerage charges, dividend distribution charges, etc.
- Discipline investment
Another feather in the cap of mutual funds is the provision to invest in mutual funds either via a regular and systematic plan – SIP (systematic investment plan) or making a lumpsum. SIP investment provides investors with regular and systematic investments in their desired mutual fund schemes at regular intervals for a predetermined duration of time.
However, if you wish to invest in stocks, you do not have the option of making an SIP investment. In essence, you’d have to invest your entire investment amount in one go.
However, investing in stocks via SIP could get tricky.
- Cost of Investing
Sure, investment in mutual funds require investors to shell out a small earnings from their returns in the form of expense ratio as fee to the fund manager for their professional management of your investments. However, you must consider the aspect of ‘economies of scale’ which would tip in your favour. Basically, due to the large size of mutual funds, investors pay only a minute fraction of brokerage to fund houses or AMC (asset management companies). This is a small price to pay for the active management of your investments. Additionally, this would also mean that unlike stocks you would not need to carry out intricate research and dedicate time to understand the markets.
To invest in stocks, investors are required to open a DEMAT account and pay regular and fees for that. This cost can be easily avoided with mutual fund investments.
Where should you invest?
There is no right answer. If you have the required expertise and knowledge to invest in the markets, and if you can dedicate time to research and analyse the markets, by all means go forth with stocks. However, if you are new to the investing world or do not have the resources or time to conduct your own research, you are probably better off with mutual funds. Whether you decide to go forward with mutual funds or stocks must entirely depend on your investment portfolio. Happy investing!