Investing in stocks, mutual funds, or any safe investment online can be an excellent way to meet your financial goals if done smartly. However, it’s common for people to need to be more informed and made aware of these terms. So let’s begin from there.
What are stocks?
Stocks are portions of the legal ownership of a company. They may also be referred to as ‘shares’. For a company, issuing shares to the public is to raise money to fund operational needs and boost the company’s growth. Investors invest in stocks to generate additional income if the company stays profitable.
What are mutual funds?
Mutual funds are a type of investment scheme that is done professionally. It involves collecting funds from the company and investing that into different stocks, securities, bonds, etc. Investment in mutual funds can be made through SIP online too.
Before investing, an investor must factor in different aspects of such investment schemes.
- Who’s Managing It:
Typically, investing in stocks would require you to participate in the purchase and sale of the shares by yourself. Investors can do it through approved stock investment platforms. Although you can hire a stock broker to do the work for you, they would typically expect a portion of your returns. On the other hand, an expert handles a mutual fund investment and decides where to distribute the funds collected. For mutual funds, investing through SIP investment is also an option.
As an investor, you are entitled to the company’s financial performance. On a surface level, claiming that stocks carry higher risks won’t be incorrect. Consider a scenario where you’re an investor who bought shares in one company. Over the financial year, the company suffered losses. Consequently, you receive negative returns on your investment. This risk is slightly more diversified when concerning mutual funds. Since the money is put into different types of assets, the return generated will vary depending on the current market trends of those assets. In other words, if you participated in a mutual funds investment scheme and your money gets invested into stocks and gold, even if the company’s stocks go down, the loss can be compensated by the returns generated from the investment in gold (if the price of gold shoots up). Nonetheless, it’s notable that both types of investment carry certain risks.
This might sound obvious- generally, the investment with higher risk will generate higher returns if the market favors the investor. On average, mutual funds generate lower returns when compared to stocks.
When selling stocks, investors are also supposed to pay taxes. Conversely, sometimes an investor may be exempt from paying taxes on gains through mutual funds.
- Investment period:
Considering the volatility of the stock market, stocks have the potential to amplify their returns over a short time. If things go right, it’s possible to earn more in less time through stocks. However, with mutual funds, returns grow slowly, so it’s unlikely to see substantial returns in less time. Therefore, mutual funds are the preferred investment scheme for long-term investments. It’s up to the investor whether to opt for short-term investments or continue investing over a long period.
The choice between mutual funds and stocks is ultimately in the hands of the investor. Before investing, investors must carefully assess the risks and returns to ensure that the investment would contribute towards their financial goals. Additionally, they must weigh the urgency of acquiring profits to make sound investment decisions on whether to go forward with short-term or long-term investments.