Where should you invest? Stocks or Equity Mutual Funds?

  • Marisha Bhatt
  • Apr 05 2021
  • 5 minutes
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When we talk about investment in the stock market, the majority of investors relate it to equity alone. But there are many options for the investor to invest in stock markets. Among the most favored or rather popular ones for quite some time have been mutual funds. Mutual funds are further of many variants like equity mutual funds, debt mutual funds, and hybrid mutual funds. But for an average investor, it is often difficult to decide which is a better investment among stocks and mutual funds. While making an investment, investors have to look at many options and select the one based on their needs, investment goals, budget, returns, expenses or risks associated with the investment, etc. 

Given below are the meaning and differences between stocks and equity mutual funds that will help the investors make better investment decisions.

What are stocks?

When a company requires for business purposes, it has the option to issue shares or stocks for the general public to subscribe to. These shares or stocks represent the ownership of the company. There are a few types of shares that can be issued by a company to raise capital. These can be convertible shares, preferential shares, ordinary shares, etc. Depending on the nature of the stock, the investor can get voting rights or preference in receiving dividends, etc.

What are equity mutual funds?

Equity mutual funds are a type of investment product that is formed by picking individual stocks or shares of companies that are listed on the stock exchange. These funds invest in equities and related instruments and are actively managed funds. The aim of these funds is to maximize the returns on the investor’s portfolio. The fund managers use their expertise in market research and analysis to ensure better returns for the investors at relatively lower expenses.

Top factors to consider before investing in stocks Vs equity mutual funds

Returns on investment in equity or equity mutual funds both are based on returns of the underlying stock. Hence, some may even say that it is essentially betting the individual investor against the professional fund managers. However, there are many points of considerations that influence the decision of an investor to invest in stocks or equity mutual funds. Some of the basic differences between the two investment products that can factor in the decision-making process are mentioned below.

  • Diversification

Investment in equity mutual funds can provide the investors with instant diversification of portfolio as each unit of the fund represents multiple stocks or securities. On the other hand, diversification in the portfolio of stocks can be achieved by investing in different stocks individually after careful market research and analysis.

  • Risk

Stocks and equity mutual funds both are subject to risk due to high market volatility. However, equity mutual funds can be considered less risky as compared to stocks due to their inherent feature of diversification which may dilute the losses of the investor. 

  • Taxation

Taxation is one aspect that cannot be avoided in either stocks or equity mutual funds. Both types of investments are subject to capital gains. Equity mutual funds, however, provide the benefit of a tax-saving instrument in the form of Equity Linked Savings Schemes (ELSS). Investors get the benefit of deduction under section 80C up to Rs. 1,50,000. Furthermore, investors can also get tax exemption up to Rs. 1,00,000 on long-term capital gains of such ELSS funds. These tax-saving instruments help you to save tax at the same time make substantial investments for the long term. Stocks do not have such tax-saving options. Tax is levied on the sale of stocks depending on the holding period of such stocks. 

  • Cost of investment

The cost of investment is a crucial factor while deciding on an investment product. Investment in quality stocks involves higher costs while investing in equity mutual funds comes at a relatively lower cost. Investors can also invest in equity mutual funds in small amounts known as SIPs and gain higher returns.

  • Control of investment

Investment in stocks provides the investors with complete control of their portfolio. The decision to buy or sell any stock in the investor’s portfolio is solely that of the investor. This control is not available to the investors while investing in equity mutual funds. The fund is managed by expert fund managers that decide to buy or sell stocks or securities based on market fluctuations.

  • Expert analysis

The biggest advantage of investing in equity mutual funds is the expertise provided by fund managers to maximize the returns on the portfolio. On the other hand, the investor has to carefully study the market as well as the financials and historical performance of the company in detail to make sound investment decisions.

  • Period of investment

Equity mutual funds usually need at least 5 years to 7 years to grow and provide good returns to the investors. Stocks, on the other hand, can be traded immediately if the market is on a high and can also provide immediate returns to the investors.

Conclusion

Investment in stocks or equity mutual funds both have their set of pros and cons but for new investors or risk-averse investors, equity mutual funds seem to be a relatively better option. They provide the investors with the benefit of hassle-free investment and also the possibility of higher returns at relatively low costs. If you are an investor having sufficient time and relative expertise in equity analysis and also have a capacity to digest the volatility of the markets, stocks can be a good option for investment.

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