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Mutual Funds vs Stocks

Modern investment methods depend on how much risk you're willing to take. Whether you decide to invest in a mutual fund or shares, it all depends on risk-taking appetite and how much return you're expecting. Higher the risk, the higher the possibility of excellent returns.

Understanding Stocks and Mutual Funds

Let's look at the two most popular forms of investments, these days - Mutual funds and Stocks or Shares. They're both very distinct from one another and yet are very promising in terms of returns depending on the market performance.

What are Stocks

A stock or a share is a part of the total share capital of a company. If you own stock in a company, that means you own a stake in the business. Companies usually raise funds to grow their business either by taking debt from financial institutions or by going public and asking small retail investors to invest in the company in exchange for equity. The process of buying a share in a company involves buying x number of units at a particular cost. These number of units can vary depending on how much you're willing to invest.

Returns on Stocks

You can earn your returns from stock market investment in two ways -

  • One is through the quarterly or annual dividends

  • The other way to make money is by selling your stock or shares at a profit.

The profit you earn is nothing, but the purchase price of the stock & the fee subtracted from the selling price.

What are Mutual Funds

Mutual funds, on the other hand, are investment vehicles through which you can invest in different shares/stocks, bonds, equity, etc. The difference is that a professional fund manager oversees your investments and works towards getting you the best returns possible. Here, you don't have to worry about deciding on which stocks to buy; you can leave it to the experts.

Returns on Mutual Funds

A mutual fund acts as a pool of money collected from various investors who share a mutual objective. Your returns are proportionate to your contribution and highly dependent on the market situation.

Mutual funds vs Stocks

Here are a few key differences between mutual funds and stocks

  • You don't necessarily require a Demat account to invest in mutual funds . Whereas, if you're investing in shares, you'll have to own one.

  • Shares can be an investment option if you're looking to make money quickly. Mutual funds, however, have a longer growth trajectory and you can expect good returns if you've invested for long-term.

  • There's a professional fund manager who manages your investments in mutual funds. Whereas, if you are investing in the stock market, you'll either need to be thorough and well-versed with the market nuances or you'll have to go through a stock trader who is an expert.

  • Mutual funds come with an added benefit of a diverse investment portfolio. Shares or stocks, on the other hand, don't unless you actively practice trading and invest in more than 1 or 2 companies.

  • Mutual funds carry mitigated risk factor owing to the array of investments, whereas stocks come with a high-risk factor.

  • There are restrictions on exiting from specific portfolios in case of mutual funds as external resources manage the fund. However, when it comes to stocks, you can buy or sell a stock at any given time, depending on your objective.

  • Stocks can help reap dividends if the company is doing well. Your growth can be directly attributed to the company's growth. With mutual funds, you invest in different stocks, so your growth is not committed to just one company. It depends on the overall market situation, most of the time.