Investing is one of the most effective ways of generating wealth. Among many investment tools, mutual funds and stock options are the most popular choices. But which one is better?
With the growing popularity, investing in mutual funds vs the stock has become a common topic of discussion among investors. Both options have unique features, benefits, and drawbacks. While mutual funds offer diversification of funds with lower risk, stocks are a high-risk, high-return choice. Choosing between stocks or mutual funds depends on your individual investment goals.
This blog compares mutual funds vs stock invetsing to help you understand the differences. Let’s start!
What are Mutual Funds?
Mutual funds are one of the best investment options for those who want to diversify their portfolio across a range of securities and lower their risk. They are an investment vehicle that pools money from many investors to invest in different asset classes, such as stocks, fixed-income instruments, gold, and money market instruments.
All these funds are managed by a professional fund manager who invests on your behalf.
What is a Stock Market?
A stock market is where stocks are bought and sold. Stocks or shares give you ownership in a publicly traded company. As a shareholder, you get a portion of the company’s profit and have a say in its decision-making. There are two types of stocks, namely, common and preferred shares.
While a common stockholder has voting rights and receives dividends, preferred stockholders receive fixed dividends but have limited voting rights. Moreover, the share price is determined by supply and demand forces in the stock market. You can purchase and sell shares on a stock exchange or through the over-the-counter market.
Difference Between Mutual Funds and the Stock Market
The following is a detailed explanation of the difference between mutual funds and the stock market. This will help you make an informed decision in your investment journey.
| Objective | Mutual Funds | Stock Market |
| Definition | Mutual funds are an investment tool where a fund manager pools money from various investors and invests it in a portfolio of securities. | In the stock market, shares are individual units of a stock of a company bought by investors. It gives them ownership of the firm. The organisation’s capital is divided into shares that you can buy or sell. |
| Ownership | Investment in mutual funds means buying units in the fund. You gain partial ownership of the fund’s investment portfolio. | With stock investment, you get partial ownership of the issuing company. |
| Management | The investment portfolio of mutual funds is managed by a professional fund manager. | Investing in shares means you have to manage the portfolio on your own. |
| Diversification | Mutual fund investments are spread across various asset classes such as stocks and bonds, and sectors as well. | When you buy shares, that means you are purchasing the stocks of an individual company. |
| Risk involved | The risk level is relatively lower than direct stocks because of diversification. | Stocks pose a higher level of risk compared to mutual funds. |
| Suitability | As mutual funds are managed by professional fund managers, both new and seasoned investors can invest in mutual funds. | Seasoned investors with sound stock market knowledge are more likely to perform better in stocks. |
| Return potential | You make moderate to high returns depending on the scheme. | Shares offer relatively higher returns. |
| Systematic plan | Mutual funds come with a systematic plan feature. | Stocks do not extend the feature of a systematic plan. |
Advantages and Disadvantages of Investing in Mutual Funds
Mutual funds are suitable for investors looking for professional assistance and portfolio diversification. However, they come with fees and do not offer higher returns. Let’s know the pros and cons of mutual funds.
Advantages
- Professional management: Mutual funds are managed by professional fund managers, who offer investors expertise and good returns.
- Diversification: One key benefit of mutual funds is diversification. By pooling money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities, mutual funds minimise investors’ risks.
- Accessibility: Even a small investor can make an investment by participating in diversified investment opportunities.
- Liquidity: Mutual fund units are liquid because they are bought and sold on their net asset value (NAV), allowing you to redeem them anytime, subject to market conditions.
Disadvantages
- High fees: Mutual funds are expensive, including management fees, sales charges, and administrative costs. This eventually erodes overall returns over time.
- Risk: Like other investment options, mutual funds are subject to market risk and fluctuations. When market conditions fluctuate, the value of underlying investments is impacted, potentially leading to losses for investors.
- No control: Portfolio managers make all the decisions related to your mutual fund portfolio. So, you lose control over investment choices and transaction timing.
Advantages and Disadvantages of Investing in Stock Market
Investing in the stock market offers higher returns to investors when the market performs well. But, everything has its disadvantages. The following are the pros and cons of the stock market. Read further to know more!
Advantages
- Increased returns: Investment in the stock market offers greater potential for higher returns during the peak performance of companies or sectors.
- Voting rights: When you invest in stocks, you become a company shareholder and acquire some ownership level. This gives you the right to vote in the company’s decision-making process.
- Dividend: Some companies offer dividends, giving you an additional income source and potentially offsetting losses from declining share prices.
Disadvantages
- Volatile market: The stock market is extremely volatile and fluctuates constantly. Share prices can increase or decrease within a single day.
- Market knowledge: Good knowledge of the stock market is essential to generating good returns from shares. You must put extra effort into monitoring the financial performance of your investments.
- Brokerage: When you purchase or sell stocks, you are liable to pay brokerage to the sharebroker. This reduces your returns on the stock market.
Bottom line
Mutual funds vs stocks? Opting for one or selecting both as an investment option depends on an individual’s financial goals and risk tolerance. The difference between these lies in their features. Stocks are the way to go if you can take risks and want higher returns. Mutual funds work if you seek an investment tool with less risk and stable income.
Still deciding between mutual funds and stocks? Let Torus Digital help you align your investment choices with your goals. Whether you’re risk-ready or playing it safe, we’ve got smart tools and expert insights to guide your journey.
