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Stocks vs Mutual Funds

  • Rudri Rawell
  • Feb 24 2022
  • 7 minutes
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Investors who are new to equity investments often ask whether they should go for stock investments or are mutual funds better. Most experts would say that there’s no one answer to this. Investing in stocks or mutual funds is often subjective and comparing one against the other is like comparing two entirely different investment avenues. 

While stock investments require investors to pick their choice of stocks, mutual fund investments have fund managers who decide the investment avenues on behalf of investors. If an investor is faced with the question of which one is ideal for him/her, certain crucial factors must be considered to ensure that personal financial goals are met appropriately. 

Here, we will highlight some of them and also explain how each of these investment formats can help investors maximize profits and minimize risks.

Investor’s market experience

If an investor has the required knowledge and experience of stock markets, direct stock investment may be best suited for him/her. However, investors who may have never or very rarely invested in stocks should reconsider direct stock investments, since these investments require an investor to be actively tracking the market movements.

With mutual funds, the fund manager looks after the scheme’s portfolio. Thus, even if an investor is unable to track the investment regularly, he/she can still earn the returns generated by the portfolio.

  • Mutual funds are ideal for passive investors who lack the time and experience of navigating market movements.
  • Stock investments are suited to investors who can actively track the stock price movements and conduct fundamental and technical analysis of the stock.

Portfolio Diversification

By investing in different avenues, investors can achieve portfolio diversification, which in turn helps in reducing risk while balancing the portfolio. With the help of a well-diversified portfolio, an investor can pass turbulent market scenarios easily without any major financial impact. 

Diversification through stocks

A basket of 10-15 stocks belonging to different sectors can offer an investor the required diversification. 

Diversification through mutual funds

When an investor invests in a mutual fund, the money is allocated in diverse sectors, since the underlying portfolio invests across different sectors. This automatically diversifies the investment portfolio and gives the investor an opportunity to fetch higher long-term returns.

Active vs passive

With availability of time and the right amount of knowledge, one can opt for direct equity investment to grow the funds. However, an investor who lacks the right knowledge and time to track the stock investments is better off staying away from direct equity. Investing in these and not tracking stock performance may result in huge losses.

With mutual fund investments, even if an investor does not actively track the investment, he/she can still fetch good returns since the fund manager actively looks after the portfolio on behalf of investors. 

  • Stock investing requires an investor to be an active market participant. 
  • Mutual funds are best suited for passive investors.

Lump sum vs SIP

Mutual funds are ideal for those investors who want to periodically make investments, for example, monthly, quarterly, etc through SIP or systematic investment plan. A mutual fund portfolio can have stocks that are under-valued or overvalued. However, choosing to enter or exit the investment is decided by the fund manager. 

In case of direct stock investments, an investor can make an investment in a stock depending on the expected price rise of that particular share. If an investor feels that the stock has reached its maximum price potential, he/she can sell the same. This, however, requires some amount of technical knowledge to gauge a stock’s current and future expected position.

  • Systematic investment plans (SIPs) work well for mutual fund investments.
  • Stock investments can be made in parts by buying one or fewer shares at a time. However, this requires careful planning for entry and exit on certain price points.

Potential to fetch high returns

Stocks can be multi baggers with returns swelling in no time. On the other hand, these can also result in losses before an investor knows it. While we can’t compare a single stock to a mutual fund returns, it is essential to note that a mutual fund can’t offer double returns within a short period, whereas a stock may have the potential to do so. 

  • Mutual fund returns are generally in line with market trends with various checks in place, especially regarding the risk levels. 
  • Direct stock investment can allow an investor to invest only in high-yielding stocks, thereby increasing the portfolio’s chances of fetching high returns, but with a concentration risk.


Stock investments do not enjoy any tax benefits. However, a tax deduction of up to Rs 1.5 lakh per annum can be availed as per Section 80C if investing in tax-saving mutual funds known as equity linked saving schemes or ELSS. ELSS schemes offer the twin-benefits of fetching inflation-beating returns combined with tax saving.

  • Long-term capital gains tax at 10% is applicable on gains made from stock investments of over Rs. 1 lakh. Short-term capital gains tax of 15% is applicable on returns from stock investment sold within 1 year of investment.
  • Same applies for returns from equity or equity-oriented mutual funds.

Which is better – stock or mutual fund investment?

Here are some important factors to consider while deciding between stock and mutual fund investments:

 StocksMutual funds
MonitoringWith thousands of stocks listed on the Indian exchanges, it is difficult to manage a large portfolio of stocks daily.Mutual funds do not require investors to actively track stock performance due to presence of professional fund managers.
Rupee cost averagingSince SIP mode is not available in stocks, investors must buy stocks in lump sum to fetch substantial gains. Therefore, the benefit of rupee cost averaging is not available.Investors can benefit from rupee cost averaging by periodically investing in mutual funds through SIP mode.
Industry concentrationTo focus on a particular industry, an investor has to buy individual stocks of multiple companies. This allows investors to gain sector exposure.To gain sector specific exposure, investors can invest in sector-specific mutual funds.
Non-equity exposureStocks are equity investments.Through mutual funds, investors can explore other investment forms like debt funds, ETFs, Index funds, etc.


Both stocks and mutual funds have unique characteristics, benefits, and risks. It is up to an investor to choose between the two or opt for both at the same time. Investors must carefully consider personal risk appetite, investment time horizon, knowledge, and financial goals before choosing between stocks and mutual funds.


How is the cost of investing different between stocks and mutual funds?

Since mutual funds are actively managed by fund managers, these charge a certain fee to the investors, which gets added to the cost of investing. As against, individual stock investments do not involve such fees. Stocks are considered cheaper than mutual funds when it comes to cost of investing.

Do mutual funds offer better returns in the long run or stock investments?

Both mutual funds and stocks can offer good returns in the long run depending on the choice of scheme or stock, respectively. In case of mutual funds, the returns depend on factors like the fund manager’s expertise and objective of the fund. With stocks, an investor’s knowledge and experience can make a difference in the returns generated.

Are both stocks and mutual funds regulated?

Yes, stock markets and mutual funds in India are regulated by SEBI or Securities and Exchange Board of India. 

How to invest in stocks and mutual funds?

To invest in either stocks or mutual funds or both, you can download the Finity app on your smartphone. The app allows seamless KYC, trading and Demat account opening process.

Can I invest Rs. 100 in stocks?

Depending on the price of a stock chosen and quantity required, you can choose to invest as little as Rs. 100 in stocks.

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