Be it the period of national or state-wise lockdown, or a rise in share market (in the form of rise in SENSEX / Indexes) or be it the period of low deposit rates, no one can deny this fact that the interest in equities is soaring like a rocket eager to touch the sky with share market being to all-time highs. But the question arises especially with relation to the first time investors or young investors who are about to start their job or business or have started recently and at the same time looking to invest their money in stocks through equity shareholding or in mutual funds, or in any other government schemes, as both the Stocks and Mutual Funds are considered to be the sort out sources, and that’s where a comparative analysis is prima facie for investing one’s hard earned money.
But what actually are both of them?
Well, Stocks are the financial instruments issued by the company that allows partial ownership in that company as well as right to claim dividends when company earns profits, and for purchasing them, a company initially go for Initial Public Offer (IPO) where it sells shares to public for the first time, and once they get listed on stock exchange, anyone can buy or sell by placing their orders and go for either call or put option, whereas, Mutual Funds are those financial instruments wherein the money is collected from many people and then injected in different assets like gold, equity, debt, etc, and owning a share in mutual fund entitles one to proportionate share in underlying basket of securities, and it is reflected in the form of Net Asset Value (NAV) (Total value of securities owned divided by number of shares), and ultimately profits are distributed to investors per unit of stake hold in mutual fund.
Following are some of the reasons why Mutual Fund holds a little upper edge over shares(stocks) in terms of investment subject to individual rationality:
1. Portfolio Diversification: It reduces the risk of concentration in a particular stock as here the investment is made in various types of stocks, and such activity mitigates the losses if one or two stocks won’t work or incur losses, but when coming to stocks, a starting investor won’t invest in more than 10 stocks on an average, thereby entailing a huge risks on his or her investment with greater volatility, and moreover if you focus on only one type of stocks for e.g. stocks related to bank or cement or any such sector, and if said sector or specific stock is in losses, then your investment don’t have any chance of mitigating it unless such stocks prices rises.
2. Professional Management: Mutual Funds are professionally managed by team of fund management who do a lot of research and study of various stocks and then identify and pick up such selective stocks that are more of profitable nature or those that signify growth in near future. They study the financial statements and other necessary information of such companies, and are well versed with risk management process, whereas coming to shares, an individual himself or herself needs to devote greater time studying about stock market as well as of various preferable stocks and analysing the headwinds and tailwinds of such stocks, and that’s why such task of identifying, analysing and evaluating risks isn’t a beginner’s cup of tea in general.
3. Discipline approach and variety present: A mutual fund follows a very systematic-cum-professional-cum-disciplined approach towards investing investor’s money, and since there are various types of funds here in the form of equity, debt, hybrid, gold, etc, with specific goals like retirement, children’s plans, etc. Depending upon the time which you want to give to an investment, you can go for either liquid funds or corporate bond funds, or any such case may be. E.g. of Systematic Investment Plans (SIPS) is very common as they allow to make a regular contribution of minimum amount of Rs. 500, whereas comparing the same to stocks, various SIPs are available through stock brokers, but again that needs to be checked depending upon the stock price, and its performance in previous days or weeks, which many-a-times doesn’t stand as a feasible option to new and occasional/ long term investors.
4. Tax Benefits: There are benefits in the form of deductions available u/s 80C under Income Tax Act of 1961 when investing in certain schemes in Mutual Funds, for e.g. Equity Linked Saving Scheme wherein deduction of upto Rs. 1.5 Lakh per year is available, whereas no such option is available here and apart from the same, there are certain charges like STT, dividend distribution tax, capital gains tax, brokerage charges, etc. though such type or kind of extra charges aren’t present in Mutual Funds apart from paying fund management fees and having minimum investment.
Therefore the above factors are not the only ones to decide between MF or Stocks, and there can be more kind of such deciding factors also, but what we can broadly understand from this discussion is that if we as an investor have a good time to study and research upon various stocks and its financial information, etc, as well as little bit fluency and efficiency in investment on regular basis, then we can afford to create our own portfolio of stocks which is perfectly fine and which more than 90% of shareholders do on regular basis, but at the same time the returns though may be anticipated higher do accordingly possesses greater risks of incurring losses, whereas if we are not able to do research or provide sufficient time in understanding and evaluating various stocks and their related news, and want our money to be looked after by fund managers professionally whose intent is to provide us a consistent return over a long term period specifically by investing in diversified manner, then Mutual Funds is the option.
Disclaimer:- The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.