Most of us who are not yet involved in investment often do not understand the difference between shares and mutual funds and get entangled in it. There is a fundamental difference between the two entities which belong to the same parent industry; business. Let’s first understand what these words really mean.
Investing in stock market
In this type of investment, you invest directly in the shares of the company. You can buy shares of companies listed on the stock exchange, whose performance is good, or the standard you set for yourself.
Investment in mutual funds
This investment is an indirect type of investment compared to stock investment wherein the investor invests in the funds raised by different types of fund houses. A mutual fund is a group investment where the fund group pools the total investment for the purchase of bonds, stocks, FD securities by a large number of investors. A dedicated fund manager by the fund group looks after the fund purchased and the investor stake. Therefore, unlike stocks in mutual funds, the investor is directly linked to the profit and loss of the fund’s portfolio.
Let’s try to understand the 6 fundamentals of mutual funds and stock investing.
Investing in direct stocks is full of much greater risk and volatility than investing in mutual funds. Portfolio diversification is the answer. When you invest mutual funds, you invest in a mixed bad of securities that can average the risks on a joint note. When you invest in shares, you are buying the shares of a company directly, which if it goes up, it makes a direct profit and if it goes down unfortunately, there is a direct huge loss.
Risks and Retailers
There is no denying the fact that the returns are exponential when investing in the stock market. Many big names have made most of their money out of stock market trading. But it is only on the silver side, there is a huge list of people who have suffered a lot while trading on the stock market. Although the returns are quite high, the risks or losses are also of the same level.
Whereas, if you look at mutual funds, most ranked mutual funds have consistently performed well over the years. However, if the returns are not as high as compared to stocks, but sufficient for creation of good assets in this period
Purchases made in stock are subject to payment of sales tax. Whenever you are to sell the stock, you are obliged to pay tax, whatever it may be. Shares offer zero tax benefit to investors. 15% tax is applicable on short term capital gains and 10% on long term capital gains (for gains above 1 lakh).
Whereas, if you invest in a tax saving scheme like ELSS under the bucket of mutual funds, it will be Rs. But comes with tax exemption. An investment of 1.5 lakh comes under the Income Tax Act, Section 80C in a year.
Furthermore, as long as you invest in the fund, you do not need to pay any tax if the fund happens to sell any stock from the portfolio.
Investments made in the stock market have to be given time. It requires dedicated attention and a lot of time to keep an eye on market fluctuations. You do not have the option of any assistance or assistance while investing in shares. Also, since the market is quite volatile, one has to keep up with the frequency of monitoring.
Conversely, when it comes to mutual funds, you have experts called fund managers whose job is to monitor the investments you make. With the consent of the investor, the fund manager decides on your behalf regarding selling and buying the course funds. Although you do not need to monitor the market, it would be appropriate to do so to monitor the performance of your fund.
Mutual funds are an excellent method of investment called SIP or Systematic Investment Plan which is a smart solution for people with busy lives and they have many things on their list. SIP allows you to make pre-fixed investments within the stipulated interval. This makes investment disciplined and automated.
There is no such option in stocks. You have to remember and pay.
With stock investing, the only option available is to invest in stocks.
While mutual funds come in a variety of options such as bonds, funds, stocks, debt-funds, equity-funds, hybrid funds, etc., you can make the risk factor negligible over time.