One of the habitually asked questions while investing is the difference between investing in stocks and mutual funds. Both mutual funds and stocks are beneficial in their own way, and this article will walk you through the key differences of mutual funds and stocks.
Why mutual funds are better than stocks
Following are some of the benefits of mutual funds and why you should consider investing in mutual funds:
- Professional Management
Leveraging the knowledge and expertise of a fund manager to earn significant returns is one of the primary reasons why investors prefer investing in mutual funds. Investment in stocks without any prior experience or knowledge about the working of the financial markets can be quite disastrous. It could even quickly drain your capital. Hence, experts often advise new investors to invest in mutual funds online via a fund manager.
- Tax-saving benefits
If you sell your investments within a year from the date of purchase, you are levied with short-term capital gains tax, (STCG tax) at the rate of 15% p.a. What’s more, one even has to pay a securities transaction tax (STT) when they trade in stocks. However, there is no such tax on the stocks that are traded by the mutual fund. This is one way you save tax on mutual funds.
When it comes to ELSS mutual funds, Section 80C of the IT Act offers tax exemption on investments upto Rs 1.5 lac. Investors can use this exemption to reduce their tax liabilities.
- Disciplined investment
Another significant advantage of investing in mutual funds is the financial discipline it offers to its investors through SIP (systematic investment plan). In an SIP investment, the investor is required to invest a specific amount periodically for a given period. This automated form of investing in a mutual fund requires an individual to decide the frequency of the investment and the quantum of payment at the start of the SIP investment tenure.
Conversely, investing in stocks this way can be quite complicated as each transaction would need to be timed and initiated by the investor.
4) Cost of Investing
Unlike stocks, which can bebought individually, actively managed mutual funds require a small fee to be paid to the fund manager(s). However, one often forgets to factor in the concept of ‘economies of scale’ that tips their weight in favour of mutual fund investments. Sure, active management of mutual funds require extra capital from the investor’s pockets. Still, due to their large size, mutual funds only request an insignificant fraction of the brokerage from an individual shareholder. In the case of stocks, individual investors are required to pay the STT fees, that can be avoided with mutual funds.
Whether you decide to invest in mutual funds or stocks, completely depends on your knowledge and expertise of the market and the amount of effort and time you are willing to spare. Mutual funds can prove to be a great investment instrument if you are an amateur and aim for steady growth returns. However, if you are a stock market guru with plenty time in your hands, investing in stocks is a better choice.
Mutual funds vs stocks – the choice is yours. Happy Investing!
