What is a mutual fund?
A mutual fund pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. This corpus of funds is managed by an investment professional known as a fund manager or portfolio manager.
When someone invests in a mutual fund, they are given “units” that represent their share of ownership within the fund; essentially, each unit signifies a portion of the fund’s total assets, and the number of units received depends on the amount invested and the current Net Asset Value (NAV) of the fund at the time of purchase.
What is stock?
Stocks, also known as equity, are an investment method for becoming wealthy. When you buy a stock, you acquire a share or partial ownership in that company. Stock investment is a way to invest in some of the most successful companies.
Direct Stocks vs Equity Mutual Funds
Many investors consider it fascinating to buy direct stocks rather than invest in mutual funds. They consider mutual funds to be boring and stocks to be exciting.
Mostly, they buy stocks based on hearsay and not their research. Simply knowing a company doesn’t mean it is a good investment bet.
Most investors stick to underperforming stocks and exit good stocks.
Most investors are unable to calculate the returns they get on direct stocks over the medium to long term.
They use the approximation method in their mind. Mostly, they are over-optimistic about the returns they generate in stocks.
Also, they tend to ignore loss-making stocks while calculating their return.
They do not like being wrong in their ability to pick the right stocks and so
they use their arguments in favor of their experience in investing in stocks.
It is also time-consuming to invest and manage a direct stock portfolio. At times, it also causes stress.
One can be better off staying with a mutual fund portfolio. It is to be noted that investors are indirectly holding stocks through the mutual fund route.
Some investors can do well as direct stock investors. For most others, mutual fund investing can be rewarding.
Stay simple. Create wealth. Stick to mutual funds.
comparison between mutual funds and stocks-
Diversification-
Diversification of a portfolio is the best way to reduce risk in your portfolio. When you invest in a mutual fund, You will find each fund invests in shares of 10 or more different companies, but on the other hand, when you buy shares it may lead to portfolio concentration risk.
Portfolio Management-
Stock selection and buy/sell decisions are outsourced to professional fund managers, who need to register as an Asset Management Company for Mutual Fund business with the Securities and Exchange Board of India (SEBI). The onus of investment is not on the investor but on the fund manager, whereas in the case of stocks, Direct stock investing requires a high level of sophistication, investment capital, and experience to pick the right stocks.
Risk–
Mutual Funds: Compared to direct stock investing, equity mutual fund schemes offer a lower level of risk through risk management practices by professional fund managers and their teams. They are able to process large amounts of information and make informed investment decisions, reducing the risk for individual investors.
Stocks: Direct stock investing involves a higher level of risk as individual investors may not have the expertise, experience, or investment capital to make informed investment decisions and properly manage risk. This can result in a lack of diversification and increased concentration risk, where a single poor-performing stock can wipe out gains.
CONTROL OVER INVESTMENT-
Mutual fund investors have less control over their investments because all the decisions related to the selection of stocks are taken by the fund managers.
On the other hand in the case of stocks, Stockholders tend to have relatively more control over their investment because it’s completely their decision whether or not to buy or sell a stock.
KNOWLEDGE OF MARKET-
In mutual funds, there are professional fund managers to make decisions on our behalf regarding the selection of stocks, so both new and experienced investors can benefit from it. In the case of stocks generally, the experienced investors are seen to make a profit the most. Knowledge of the market and experience become very important in stock selection.
