Mutual Fund vs Stocks - Which Gives More Returns ? | ज़्यादा Returns किसमे है
Stocks are financial instruments issued by companies, which gives Investors part ownership in a company. Investors park their surplus into stocks mainly for capital appreciation, dividends, and also for voting rights, which allows them to be a part of key company decisions.
In common parlance, stocks are also known as shares and as equities.
Mutual Funds, on the other hand, are financial instruments wherein money is mobilized from many investors and invested into different asset classes like equity, debt, gold, etc., depending upon the investment objective of the Fund.
Mutual funds are professional outfits that offer professional fund management capabilities and many fund choices. In fact, there are 3 major categories of funds which are – Equity funds, Debt funds, Hybrid fun. And then, there are solution-oriented funds like retirement funds and children’s Fund, plus other variations like index funds, exchange-traded funds, and Fund of Funds options.
Stocks or Mutual Funds: What should you pick?
Although both these options allow you to invest in equities, there are more than a few reasons that you should take the Mutual Fund route. Here are the top 7 reasons:
Portfolio Diversification
Mutual Funds invest in a large universe of stocks, which provides excellent portfolio diversification and reduces concentration risk. A good number of diversified funds in the Industry have 50 stocks or more in their respective portfolios.
This diversification helps in limiting the losses in the portfolio in case 1 or 2 stocks get impacted on account of some negative events. The fact that equity funds can take only 10% exposure into a particular stock also minimizes the risk element in the investments.
On the other hand, an investor’s stock portfolio generally tends to be 10 to 15 stocks. This equates to higher volatility in the portfolio, which will get tested when the market goes up and down.
Now, if you want to have the same kind of diversification as a Mutual Fund, you will need a large amount of money. Additionally, there are costs associated with buying and selling. For example, you will need more than Rs. 1 lakh if you wish to buy 1 share of each of the constituents of NIFTY 50.
The benefit of mutual funds is that even by investing a small amount of just Rs. 500 in a mutual fund, an investor gets exposure to a large set of stocks across market capitalization and different sectors in his portfolio.
2. Professional Management
Mutual Funds are professionally managed with a Fund Management team that does a lot of research on stocks, sectors, and the economy.
Once they decide on the universe of stocks, this team spends a considerable amount of time studying the financial statements of the companies and meeting up with the management of these companies, which allows them to get a holistic view of the stocks to be included in the portfolio. Most of the fund houses are also proficient with a robust risk management process, which puts in stringent binding constraints, which in turn does not allow the fund management team to take undue risks in their portfolios.
On the other hand, when it comes to stocks, Investors will have to spend a considerable amount of time researching stocks and multiple sectors to understand the headwinds and tailwinds in the underlying business. Investors dealing directly in stocks should also have a fair idea of the macro-economic scenario, which will give them a good perspective on which sectors and stocks can work well going forward.
This is an essential exercise, which needs to be done by the Investors as his portfolio of 10 to 15 stocks needs to be diversified across market capitalization and sectors depending on his risk profile.
In other words, the individual investor must do most things that the fund management team of fundamental analysts, technical analysts, economists, and risk modelers do. That is certainly not a beginner investor’s cup of tea from a time & effort perspective.
3. Cost
One of the economies of scale enjoyed by Mutual funds is in terms of the cost advantage, on account of the huge transaction volumes involved in the buying and selling of stocks.
Further, In 2013, SEBI had introduced Direct Plans for the mutual fund Industry. Under a direct plan construct, the fund houses subtract the commission payments to distributors from the operating expenses, which leads to a lower expense ratio for the investor.
On the other hand, if you buy stocks directly, then you will have to pay charges like Brokerage, STT, SEBI turnover charges, GST, transaction charges, etc. But the good part is that unless you are doing regular daily trading in stocks, these expenses tend to be low over the long
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