Stocks vs. mutual funds, 7 key differences, what to prefer?
Many individuals wonder which of the two investing options, mutual funds or stocks, is better. To receive the highest returns on your investment, let’s look at the differences between mutual funds and stocks.
There are several basic differences between mutual funds and equities when investing.
Both instruments differ in investing approach and management, starting with the Return on Investment and risk. Before making an investment selection, like an informed investor, you should be aware of these differences.
This article explains the differences between stocks and mutual funds.
When you make an investment in stocks, you have complete control over your selections. However, if you invest in mutual funds, the fund manager makes this decision on your behalf. Before deciding on any asset class to meet your objectives, you must consider a few key considerations.
Most of the investors are undecided on whether to invest in stocks or mutual funds. Let’s be clear: there is no right or wrong answer here. It’s entirely subjective, and comparing one to the other is like to comparing apples to oranges. When you invest in stocks, you have complete control over your selections.
However, if you invest in mutual funds, the fund manager makes this decision on your behalf. Before deciding on any asset class to meet your objectives, you must consider a few key considerations. What exactly are they? Let’s have a look.
Market Experience
If you have the necessary information and expertise, direct stock investment may perform wonders for you. If you just invest in stocks once in a while or rely on third-party advice, you should consider it hard before committing. You must be an active market participant if you invest in stocks.
Mutual funds, on the other hand, are a different story. The fund management manages your portfolio, and even if you forget about your investments, you may still gain money. Mutual funds are ideal for passive investors with limited time and expertise in navigating market fluctuations and reading between the lines.
Diversification of your portfolio
Diversification is one of the most important aspects of investing since it reduces risk and balances your portfolio. A well-diversified portfolio can help you navigate turbulent waters and turbulence with ease. Diversification is provided through a portfolio of 10-15 stocks from several industries. When you buy a single stock, you gain exposure to the company’s industry. If you buy stocks in a technological company, your exposure is confined to that industry.
When you invest in a mutual fund, on the other hand, your money is spread over a variety of industries. This is because the fund’s underlying portfolio invests in various industries. It assists in automatically diversifying your portfolio and provides an opportunity to increase long-term returns.
Superlative Against Moderate
You might experience intense delight or sadness while investing in stocks. If you have a multi-bagger, your profits might quickly increase. On the other side, there’s a good risk you’ll be sitting on an agonizing dud that drags down your profits. However, you can’t compare the returns of a single stock to those of a mutual fund.
It’s also important to keep in mind that a stock may, although a mutual fund can’t quadruple your money overnight. Mutual fund returns are consistent with larger market movements. There are other safeguards in place with mutual funds. According to SEBI regulations, the fund manager must adhere to specific directives.
On the other hand, direct stock investing might encourage you to invest in high-yielding stocks, raising the concentration risk in your portfolio exclusively.
What Should You Do If You Can’t Decide?
You should invest in both financial instruments with an open mind. While mutual funds are a good way to establish a goal-oriented portfolio, the correct stock purchase may help you leave a legacy to be proud of.
What Is the Difference Between Investing in Mutual Funds and Stocks?
When you purchase a share, you get legal ownership of the firm, voting rights and the right to a portion of the company’s income. You can also attend the company’s Annual General Meetings and write to them.
Buying stock, on the other hand, is a direct investment in the stock market, with earnings generated in one of two ways:
-Dividends received
-Stocks sale
When you invest in mutual funds, you purchase a portion of a pooled fund that a group of investors has assembled. The amount of mutual fund units you buy during the investment is your share. The mutual fund house has exclusive rights and benefits for you.
You may invest in equity as an asset class in stocks, but you can invest in one or more asset classes or sub-asset classes in mutual funds since mutual fund schemes can contain a diverse portfolio.
Investing in mutual funds is a kind of indirect stock market involvement.
You can only profit from mutual funds by selling units, and dividends paid on the scheme’s shares may or may not be immediately available.
If you choose the “Dividend” option, the fund company will distribute the dividend to you. If you choose the “Growth” option, your dividends will be reinvested in the fund to create returns.
Now that you know the difference between mutual funds and stock market investing, you can make an informed decision. Let’s examine the characteristics of stocks and mutual funds to see which is the better option for you.
Investing in Mutual Funds vs. Stocks
1. The Return on Investment
Buying individual stocks is a high-risk, high-reward proposition. There’s the possibility that you’ll wind up with a loss.
Equity mutual fund schemes have a diverse portfolio, even though they have a higher risk owing to the asset class they invest in. Positive returns on another stock might offset negative returns on a particular stock.
As a result, investing in mutual funds allows you to avoid negative return possibilities.
2. Management
When making an equity investment, you rely completely on your research, expertise, and abilities, which may not be enough in all market conditions. You may be restricted by tools and services that may assist you in effectively managing your stock investment.
All of these disadvantages do not apply to mutual fund acquisitions.
Mutual fund entities have fund managers who are seasoned financial specialists who look after your money. The fund house also has access to all necessary tools and resources for managing the money.
3. Expanding your horizons
A well-diversified portfolio should contain at least 15 to 20 equities, but that may be a significant investment for an individual investor.
Investors with small amounts of money, as little as INR 1000, can access a diverse portfolio through mutual funds. Purchasing units in a mutual fund allows you to invest in several stocks without putting up a large sum of money.
4. Price
When acquiring shares, mutual funds benefit from economies of scale, resulting in cheaper transaction costs and, as a result, lower brokerage fees than individual investors.
You can also avoid paying yearly maintenance fees on Demat Accounts because mutual funds do not require them.
5. Investing Strategy
When you invest in stocks directly, you must do your research and enter and exit the market depending on your findings. You must spend time managing your investments.
It is up to you to decide whether to purchase or sell. As a result, when you invest in stocks, you have complete control over your investment decision, making you an active investor seeking to maximize your profits.
In the case of mutual funds, you do not have the option to pick or trade stocks, or any other Assets, throughout the investment term.
You become a passive investor since the fund manager handles all of the investing, tracking, and management on your behalf. If you’re new to stock investing and don’t want to spend much time analyzing stocks, mutual funds are the way to go.
6. Trading / Investing Time
Stocks can be purchased throughout the exchange’s trading hours, which run from 9:15 a.m. to 3:30 p.m., and transactions are completed at the current price.
Mutual funds can only be bought or sold once per day when the NAV has been settled at the end of the day.
7. Tax Advantages
Under Section 80C of the Income Tax Act, 1961, ELSS mutual funds can help you save up to INR 1.5 lakhs in taxes.
There is no way to save money on taxes by investing in inequities.
When is investing in stocks preferable?
The lords of investing knowledge hail the almighty index fund — the best “set-it-and-forget-it” of them all in this “one-size-fits-all” world. Are they, however, unwittingly blinding themselves to the ambitions and main aims of actual people in the process? After all, no one wants to be buried with the words “Here Lies John Doe – He Bested the S& P 500.”
Many people only think about investing through the lens of their 401(k) plan (k). This narrows their scope to only mutual funds. “Most investors are forced to do it,” says Merlin Rothfeld, lecturer and financial strategist at Online Trading Academy in Irvine, California. “They’re stuck in a 401(k) or IRA that only has mutual funds.” This isn’t through chance; it’s on purpose.”
The emphasis has changed from investment to retirement with these retirement programs, which are now designed to make saving even easier. More individuals are saving for retirement being a result of this transition.
On the other hand, many people lack real-world investment experience. This is crucial because they will be leaving the haven of the plan sponsor’s watchful eye when they retire. They’ve spent their whole professional lives living with the Swiss Army Knife equivalent of investing, only to be handed a box of tools and their gold watch.
It’s not as if pooled investment vehicles like mutual funds and ETFs don’t have their own set of benefits. “The simplicity of use, capacity to diversify for small accounts and a mix of costs or technical expertise are the reasons ETFs and mutual funds are so popular,” says Benjamin C. Halliburton, Chief Investment Officer of Tradition Asset Management Summit, New Jersey.
“Investing in individual stocks necessitates using a research team or hiring a research team through a separately managed account maintained by an asset management-oriented RIA.”
Face it, far too many people have lost the skill (and possibly the desire) of sorting through individual stocks searching for the gold nugget. Is it possible to blame them?
You’ll see the commandment “Thou Shall Diversify” wherever you look, from the media to marketing. Everything should be taken in proportion, according to Aristotle. Should this be used for diversification?
This, according to Rothfeld, is the effect of “market conditioning.” We’ve all heard that diversifying our Assets may help minimize risk over time, and it’s easy to believe that mutual funds can assist. While there is some truth, mutual funds are not the best investment to have in your portfolio.”
Individual securities used to be the center of the universe. That was done for a reason. Though interest in stocks and bonds may have diminished in recent years, the reasons for doing so remain as true now as they were a generation ago.
The Dow drops 600 points in a ‘brutal and ugly’ end-of-week selloff fueled by the Fed’s hawkish stance.
It’s all about maintaining personal privacy. It’s similar to the difference between taking public transit and ordering an Uber. Take public transit if you want something inexpensive (and inconvenient). Call an Uber if you want a customized service that gets you where you want to go, when you want to be there.
Individual stock and bond portfolios are like chauffeured limos, whereas mutual funds are like city buses. According to Claudia Gonzalez, an Investment Advisor with Kovar Capital in Lufkin, Texas, “individual equities and bonds are a better choice than mutual funds in general.” “An adviser can choose particular stocks and bonds that meet an investor’s risk and financial goals based on their risk and financial goals.”
Taking the bus is OK. You may like the ride. However, the bus may not always bring you where you need to go. You may need to call a cab at times.
Here are five points to consider when investing in individual stocks and bonds rather than mutual funds and ETFs:
#1: You want to be able to better control portfolio risk.
You have your own set of worries and requirements. These may be translated into real investing ideas for your portfolio. However, you can find yourself tethered to your mutual fund. It’s made for the masses, not for the individual. All you have to do now is focus on your risk. Mutual funds can’t help you with that.
“You have a greater capacity to appropriately diversify your portfolio with a personalized strategy,” says Benjamin Beck, Managing Partner and Chief Investment Officer of Beck Bode, LLC in Dedham, Massachusetts. “Most mutual funds have many more securities (sometimes far more) than required to diversify adequately. Future returns are diluted being a result of this over-diversification.”
Individual securities allow you to link a particular stock or bond to a specific risk. You may turn the assignment on and off whenever you choose when your situation and the economic climate change.
“Buying individual stocks or bonds provides investors more control over their investment timing,” says Matt Ahrens, Chief Investment Officer at Integrity Advisory, LLC in Overland Park, Kansas. “Perhaps you believe the market is overvalued. Therefore you’ll have dividends paid to cash to build up dry powder for a period.” Cash is a drag on the performance of mutual funds and exchange-traded funds (ETFs). When buying individual assets, investors must grasp the necessity of risk management.”
Surprisingly, the fixed income asset type poses the most risk. “Many bond mutual fund investors are ignorant of the link between rising interest rates and falling bond prices,” says Jeff Mount, President of Real Intelligence LLC in Fairfield, Connecticut.
Bond prices (and mutual fund bond funds) fall when interest rates rise, showing the danger to your investment. “Individual ties are a different beast altogether,” adds Ahrens. “When interest rates rise, individual bonds provide some safety since you know you’ll receive your money back at maturity as long as the firm doesn’t go bankrupt.”
Individual stocks and bonds can handle your financial risk with a level of accuracy that mutual funds can’t match.
#2: You want to keep track of your tax obligations.
Similarly, mutual funds fall short when dealing with tax liabilities. “One drawback of mutual funds for customizing tax concerns is that investors earning dividends and realized capital gains would pay taxes on those transactions,” says Robert Johnson, a finance professor at Creighton University’s Heider College of Business in Omaha. “You could wish to customize your portfolio to your tax situation by using particular stocks and bonds.”
While tax-deferred investment vehicles such as 401(k) plans and IRAs may not need this, you will almost certainly have taxable investments. Individual holdings can help you save money in this situation. “When an investor has sufficient assets, individual stocks are more tax-efficient than mutual funds and should be used in taxable portfolios,” argues Halliburton.
“Individual stock portfolios do not pick up embedded profits.” Loss harvesting might be taxed on a per-security basis. Furthermore, donating highly regarded individual stocks to a charity, donor-advised funds, or a charitable trust can assist you in avoiding capital gains.”
If you find yourself in a scenario where tax efficiency is required, you may wish to limit your mutual fund exposure.
#3: You want a more consistent source of income.
Bond funds, once again, fall short of the “fixed income” promise. You risk losing your principal, but you also can’t count on the fund’s dividend rate to be consistent. A bond fund is a collection of bonds rather than a single bond. A bond fund operates more like a dividend-paying stock in this sense.
In that case, why not go for the real deal?
“When buying high-quality, low-volatility equities, I like to use individual securities,” explains Ahrens. “Investors who can live off dividends from their assets can develop a well-diversified portfolio utilizing individual companies such as Coca-Cola, Johnson & Johnson, Microsoft, and others. If you concentrate on the dividend kings, your dividend payments will be able to keep pace with inflation as the firms raise their payouts.”
As you near the conclusion of your working career, the necessity for income stability, or at the very least a strategy to maintain a financial buffer, becomes increasingly crucial. “If an investor is approaching retirement, he or she can choose particular equities that offer a stable dividend, sometimes known as blue-chip stocks,” Gonzalez explains. “Dividend dividends from these corporations provide a steady source of income notwithstanding market fluctuations.”
Your retirement will be more comfortable if you have a consistent and predictable income. Individual stocks and bonds, rather than mutual funds, make this easier to do.
#4: You have a strong activist streak.
Here’s something you might not have considered. You wish to have a positive impact on the world.. It’s a little more challenging if you don’t have a place at the table.
“One of the biggest benefits of holding individual shares is that you may vote your shares at annual meetings and participate in board meetings,” says Steven Jon Kaplan, CEO of True Contrarian Investments LLC in Kearny, New Jersey. “Activist investors or those who wish to personally engage in shareholder gatherings might benefit from this.”
You probably be better off holding the particular stocks that matter most to you, given the current interest in ESG (and the concomitant disagreement regarding the term’s definition when it comes to so-called “ESG” funds). You may purchase a bunch of connected businesses. You can avoid a swarm of connected businesses.
Assembling a stock portfolio, according to Halliburton, allows for “customization for ESG and focused holdings.” ESG solutions tailored to an investor’s needs might directly reflect that mandate. Complementary portfolios can be built around a low-cost concentrated position to provide actual diversity. A healthcare executive, for example, may have a complementary portfolio that invests in everything but healthcare.”
You don’t have to shun companies only to reduce your exposure to the industry you work in. You may opt to avoid them just because you dislike the industry.
“You won’t own cigarette companies if you don’t want to,” Beck argues. “With a mutual fund method, you have little control over the mutual fund’s underlying assets.” Even if you are opposed to cigarettes, you may own a tobacco corporation.”
#5: Even if it’s on a little scale, it’s your chance to play “Tycoon.”
Portfolios of stocks are more transparent than mutual funds or exchange-traded funds (ETFs). “On their Account statement, investors can see exactly what is in their portfolio,” Halliburton explains. Thanks to this openness, you get to move the pieces on the chessboard of your own company empire.
Unlike mutual funds, publicly listed companies are businesses that make money from the products and services. They are your companies. You are, in a sense, a business owner. “Individual stocks reflect ownership in actual businesses that generate products and services, are driven by research and development and patents and are improved by brands and management teams,” according to Halliburton.
These real companies increase intrinsic value, which is reflected in the stock price over time.”
It’s like though you’re the boss when it comes to stocks. You are the boss of the company’s management and its employees. You may even fire them by selling the shares if you don’t like their work.
That gives me a sense of accomplishment. Forget about taking the bus. Don’t bother with the chauffeur. You are responsible for your vehicle.
When You Should Choose Mutual Funds Over Individual Stocks
1. Management Expertise
When you invest in a mutual fund, you don’t have to worry about evaluating, selecting, timing, tracking, or managing the purchase. A skilled and professional fund manager oversees everything.
2. There are no taxes on gains made in the short term.
If you sell a stock before one year has passed since you bought it, you will be subject to 15 percent Short Term Capital Gains (STCG) taxes.
On the other hand, mutual fund entities are exempt from paying STCG on stock traded. The gains are either dispersed or reinvested in the mutual fund, which probably benefit you being a unit holder in the long run.
To avoid paying the STCG tax, you must keep your mutual fund investment for at least one year.
3. Expanding your horizons
To build a diversified equity portfolio, you’ll need to invest in at least 15 to 20 equities, which entails an important initial commitment.
Investing in a mutual fund is more advantageous in this case. You gain a varied portfolio across assets with an INR 1000, which means that if you invest in Equity Mutual Funds, you get a diversified equity portfolio.
4. A Lower Price
When it comes to purchasing and selling, mutual funds rely on economies of scale. They even bargain with brokers to acquire better prices, which results in cheaper expenses that are passed on to unitholders indirectly.
This is not the Case while purchasing stock. Furthermore, you do not need to keep a Demat Account when you invest in mutual funds.
We hope you now understand the differences between mutual funds and stocks and which is the superior investing option. Suppose you want to profit from the inflation-beating gains given by stocks while avoiding many of the pitfalls of direct equity investment but are limited by time and knowledge. In that Case, mutual funds are the best method.
