There are two popular modes of investing in equities – either through mutual funds or direct investment through stocks. Are you confused between these modes of investing in mutual funds? Don’t worry, we have got you covered. In this article we will focus on the differences between these two modes of investing and understand which mode of investing is ideal for your investment portfolio.
Mutual Funds vs. Stocks
Following are some of the differences between stocks and equities that can help investors make a choice between investing in equities via stocks or mutual funds:
- Professional Management
One of the primary reasons why investors choose to invest in mutual funds is the professional management it offers to investors. So, you can leverage the knowledge and the expertise of a fund manager to help you choose the right type of investments for your portfolio. Hence, novice investors are usually advised to invest in the markets through mutual fund investments.
- Save tax on mutual fund
Certain mutual funds such as ELSS mutual funds offer tax benefits to investors as per Section 80C of the IT Act, 1961. An investor can enjoy tax benefits of up to Rs 1.5 lac per annum. You can save up to Rs 46,800 when you invest in Section 80C investments provided that you belong to the highest tax income tax slabs. Hence, mutual funds help investors to save tax.
- Disciplined mode of investment
Another perk of investing in equities through mutual funds is that you can invest systematically through disciplined way of investing. SIP allows individuals to invest in mutual funds in a systematic and disciplined manner. Through SIP mode of investment, you can divide your total investment amount among small, insignificant sum of money over time. This automated mode of investment allows investors to choose the frequency and the periodicity of their mutual fund investments. Though investing in stocks through SIP mode of investment is possible, it would be quite tricky as you would have to time each transaction by yourself.
- Cost of Investing
Some investors prefer to invest in equities through stocks rather than mutual fund investments due to the lack of any professional management fee paid to fund managers. As an investor directly invests in the stocks, there is no need of any fund manager and hence no expense ratio. As a result, the cost of investing in stocks is comparatively lower than mutual fund investments.
- Investment Horizon
Another good distinction between the two modes of investment is the investment horizon of mutual funds and stocks. On a general rule, it is advised to stay invested in mutual funds for a long-term horizon of 10 years or the more. Contrary to that, if you choose the right time and stocks to enter and exit the markets, you can earn substantial returns.
What should you choose? Stocks or mutual fund investments?
Whether you decide to invest in equities through stocks or mutual funds must depend of your expertise and the command you hold over the markets. Mutual fund investments might be a good choice for investors who are just beginning their journey in stock markets. On the other hand, if you have the required knowledge, time, and skills to invest in the markets, stocks might be a better mode of investing for you. Happy investing!