Individual Stocks vs. Mutual Funds: Who Wins?
All stock investors strive towards a common goal – high returns. But most fail to understand which investment route suits them best. So, when one is asked to make a choice between the two most popular investment options – mutual funds and individual stocks, he gets confused. In such instances, healthy financial advice is much needed to give him clarity.
Even if you have no one to guide you with the merits and demerits of choosing a particular investment plan, not to worry! This piece would be a useful read at this moment. Here you will get to learn about the key differences between Individual Stocks and Mutual funds, what are the benefits you can extract from both and how one stands as a better option over the other.
Investing in a stock implies owning a share of a particular company whereas a mutual fund bundles multiple company stocks to turn it into a single investment. So, here is the basic difference. From this, you can easily conclude that mutual fund has an upper hand as it offers portfolio diversification. You can pool 50-100 stocks in one single stock fund.
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Apart from this, there are quite a few other parameters that make the mutual fund a better investment option. Let us see how.
The Risk And Return Tradeoff
Mutual funds are less risky when compared to stocks and the reason is quite obvious. Since you are putting your money on a single company share, whenever that particular stock performs poorly you have to bear the loss.
A very good example of this is the 2008 case of Lehman Brothers Stock. Lehman Brothers, once an acclaimed player in global financial and banking services, witnessed the largest bankruptcy ever in the year 2008, thereby causing the bank’s demise. Its downfall triggered massive loss to all its shareholders, especially those who have put their entire investment in Lehman Brothers. Luckily, the loss for those holding mutual funds, with one or few of its investment on Lehman Brothers, was not that hard-hitting.
In terms of high-returns, stocks might be a good choice but whether those returns are certain remains a question. Because no one can assure you at the time of investment that the stock you have invested on will always yield profit. There will be times when there will be a surge in the share prices and then all of a sudden price will drop. But this type of risk gets minimized when you choose a mutual fund. If one company in the stock fund underperforms, others will balance the loss. And the good news is there are multiple success stories of investors earning handsome returns by diversifying their investment among various stocks.
Keynote: From the stock diversification and risk perspectives, Mutual fund is a clear winner.
Stock investing is an individual affair and the decision of buying and selling equities at what time and in what manner depends entirely upon the investor. It requires a lot of effort, analysis and research from the investor’s side on each company stock before taking the final call. You need to keep a close watch on the stock market movements daily, learn to read and understand financial reports. Until and unless, you get a strong grip on the current financial market, it will be very difficult for you to create a rich portfolio. By no means, you can afford to miss adding the stocks of the industries that are on their upswing mode.
By now, you must have imagined how much time and effort you are required to put to create a strong and diversified stock portfolio. First, you need to investigate a good number of companies, and then analyze their income, strategies and company sizes before making a final stock selection. It is really difficult for most people to invest so much time, especially when they are already occupied with full-time jobs.
However, in the case of mutual funds, specialized knowledge and experience in the stock market is not a necessity. Complete monitoring is done by the fund managers who are assigned the task of adding high-return stocks and removing the low-return stocks from the portfolio. The time management gets completely eliminated when you decide to invest in mutual funds.
Tip: If you don’t want to stress yourself with a time-intensive investment, then go for a mutual fund. It is easy, convenient and saves time.
Costs and Taxes
Stock investment involves payment to brokers whenever you buy a new stock or sell out existing stock. This is generally called the Brokerage fee. And, on top of that, if you are an amateur seeking appropriate advice about the market and the companies whose stocks you are willing to purchase, you will have to hire a full-service broker. And, this is a costly affair. If you are knowledgeable enough to strategize your own portfolio, you are saved.
Though mutual funds involve management fees, it is paid annually. In some cases, like an exchange-traded fund, the fee is minimal. For no-load funds, there is no fee at all. To put in simple words, mutual funds cost lesser than individual stocks in terms of management and service fee.
When it comes to tax benefits, your mutual fund investments are more profitable. Instruments like SIP give you opportunities to reduce your tax liability if you hold your assets for more than a year.
Keynote: If you ask me to suggest a cost-efficient and tax-saving investment instrument, Mutual fund will be my answer.
For your quick understanding, I am pointing out the key factors of Mutual funds that outdo the performance of equities and stock trading in the current market scenario.
Apart from the 3 above worth-mentioning pros, mutual funds have other advantages too. For example, it is a lot more convenient in terms of liquidity. Mutual funds are more preferred by the investors over stocks because on redemption you can receive the amount within one week. Also, from the psychological point of view, it is advisable to invest in mutual funds as equity investors are always optimistic and confident about their own knowledge and this leads them to make a blunder in the stock market. To avoid such tragic incidents you should choose mutual funds where you have your expert advisor by your side always.
The below chart will give you a more clear picture. It depicts the fast-paced growth of the MF industry in India in the last 10 years.
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Planning a secure future is a must in an economy like ours, where the market is highly volatile. Long before you realize, share prices will fluctuate and you will be at a loss. Before such a situation arrives, you should seek ways to derive the best results in term of returns. And honestly, mutual funds show you the right path to such an outcome. Yes, it’s true that investing in stocks can give you high returns, but keeping in mind the volatile nature of the stock market, most step back. The best suggestion here is to invest in less risky assets i.e. Mutual fund under the proper guidance of a mutual fund advisor. To obtain good returns in less time, less effort and negligible knowledge, you can also buy mutual funds online with some easy steps than trading directly in equities.