While investing in both mutual funds as well as equity and stocks is generally considered to be a sound long-term plan, it is important to understand the difference between the two in order for an individual to accurately gauge which kind of investment best suits his or her risk profile.
Some of the main differences between mutual funds and equity can be seen below:
- Risk - Mutual funds are usually considered to be best suited for those individuals who have a low risk profile or are risk-averse by nature. However, investors in equity or individual stocks tend to be more active with a penchant for taking risks. In this sense, mutual funds are seen as a ‘safer’ bet in comparison to equity stocks, due to their low risk quotient.
- Returns - While mutual funds offer investors very decent returns over a period of time, equity stocks have the potential to bring the investor extremely high returns over a much shorter period of time. Investing in stocks can be tricky, and is usually only done by individuals with an in-depth understanding of market conditions.
- Volatility - Equity stocks or individual stocks are very volatile by nature. The value of these investments could skyrocket or plummet within an extremely short span of time, leading to either massive profits or damaging losses. However, mutual funds are a much more stable form of investment due to its diversity. This makes it a less volatile form of investment since all gains and losses are spread out over a wider range of stocks.
- Convenience - Individuals who invest in mutual funds enlist the services of a fund manager who takes care of his or her portfolio, making it an extremely convenient form of investment. However, investing in equity requires the individual to constantly monitor his or her investments due to the ever-changing nature of individual stocks. Investors in equity are dependant on their own knowledge of the market while mutual fund investors rely on the expertise of the fund manager to guide them.
- Costs - Trading in individual or equity stocks usually comes at a huge cost. Sometimes, any profits made from the sale of a stock can be wiped out due to the high trading cost involved. This is one of the reasons why only those investors with a high risk profile tend to invest in equity. Trading in mutual funds, however, comes at a much lower cost since these expenses are spread over all portfolios within the fund.
Based on the information outlined above, both mutual funds and equity stocks come with their pros and cons.Therefore, it is highly recommended that individuals looking to invest in either one take the time to determine which form of investment best suits their profile as well as their budget.
Mutual Funds or Equity – Which is a Better Option for you?
Whether you wish to invest in mutual funds or equity shares will depend upon your knowledge of the market. Common investors have two options to invest in equities. They can either choose to purchase shares directly from listed companies using a demat account, or they could hold shares indirectly by making investments in equity mutual funds. The right choice for you will depend a lot on your investment needs. Mutual funds, however, have been preferred over equities by a large number of people for the following reasons:
- Instant and relatively cheap diversification
- Efficient risk management
- Active management of portfolio
- Innovative models for investment and withdrawal
- Lower transaction costs
Summary of the Major Differences Between Mutual Funds and Equity
|Ownership||No stake owned by the investor||Investor gets a share of ownership in the company|
|Returns||Risk is low and returns are higher||No guarantee of returns. Returns are generated in case the company profits|
|Costs||Investor will have to incur costs on fees to fund managers and other charges||No such fees or costs involved|
|Risk||Susceptible to changes in the market, fairly risky||No risk involved as investors already know how much they can expect|
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.