Mutual Funds vs. Stocks: Which is Better for You?

Are you looking to start your investment journey? We’ll take a guess. You’re confused about which is the better option for you – mutual funds or stocks? Right?

You’ve come to the right place. We’re here to educate you about both, so you can take an informed decision. 

At Vittae, we want to empower everyone with financial growth and wellness.

Every money story matters. We’re excited that you want to build your money story. 

Be it mutual funds or stocks, it is the mindset of growth that is key to financial freedom. And you, my friend, are on the right track! 

Read on to know in detail about mutual funds, stocks, how to invest in them, differences, risks involved about the same. 

What are Mutual Funds? 

A mutual fund is like a big basket of money that is collected from many people who want to invest their money. The money is then used to buy different types of investments like stocks, bonds, or other assets, depending on what the fund is trying to achieve.

The goal is to make money for the investors by buying and selling these investments.

When you invest in a mutual fund, you buy a small piece of that big basket of money. This means you are investing in various investments, which can help reduce your risk.

A professional manager is in charge of deciding which investments to buy and sell, based on the fund’s goals.

The value of your investment in the mutual fund goes up or down based on the performance of the investments in the fund.

You can buy or sell your shares in the mutual fund at any time, and the price you get is based on the value of the investments in the fund at that time.

Mutual funds are a way to invest your money in a diversified portfolio of investments, managed by professionals, to earn a return potentially.

What are stocks? 

Stocks, also known as shares or equities, represent ownership in a company. When you buy a stock, you are buying a small piece of ownership in that company.

Stocks are bought and sold on stock exchanges. In India, the Stock Exchange Market is the NSE or BSE (National Stock Exchange or Bombay Stock Exchange).

When a company sells stocks to the public, it is called an initial public offering (IPO). After that, the stocks can be bought and sold by anyone on the stock exchange.

The price of a stock can go up or down based on many factors, such as the company’s financial performance, industry trends, and global economic conditions.

Investing in stocks can be risky, as the value of a stock can be affected by many unpredictable factors. However, over the long term, stocks have historically provided higher returns than other types of investments, such as bonds or savings accounts.

Investing in stocks requires knowledge, research, and a long-term perspective. It’s important to do your own research or work with a financial advisor to determine which stocks are right for you and your investment goals.

As the below image shows, there’s been explosive growth in Demat accounts in the last decade. From 2020 to 2021, the number of Demat accounts has almost doubled. The information from SEBI shows how the public is aware of the long-term benefits of investing, to achieve their financial goals.

Are Mutual funds and Stocks different? 

Around this time, it’s all about cricket fever in India because of IPL (Indian Premiere League). Everyone roots for our favourite teams!

Investing in stocks is like picking individual players for your fantasy sports team. You do your research, pick the players that you think will perform well, and hope that they do.

If they do, your team succeeds and you make a profit. But if they don’t, your team might lose, and you might end up losing money.

On the other hand, investing in mutual funds is like drafting an entire sports team for your fantasy league.

Instead of picking individual players, you choose a team of players with different strengths and weaknesses. When combined, you create a well-rounded and competitive team.

In the same way, a mutual fund is a collection of different stocks, bonds, and other investments that are managed by a professional fund manager.

By investing in a mutual fund, you are essentially investing in a diversified portfolio of different assets, which can help expand your risk and potentially increase your chances of success.

So, investing in stocks can be exciting and potentially lucrative. But, it is also risky and requires a lot of research and expertise.

Investing in mutual funds, on the other hand, can offer a more diversified and potentially less risky approach to investing, while still providing the potential for growth and profit.

Key differences between Mutual Funds and Stocks

Ownership

When you buy stocks, you own a share in a company. That means you have a direct ownership stake and the potential for capital gains and dividends.

When you invest in a mutual fund, you own a share in a diversified portfolio of investments managed by a professional fund manager.

This means you have indirect ownership and the potential for returns based on the performance of the underlying assets.

Diversification

Investing in stocks is typically more volatile and risky than investing in mutual funds. Mutual funds offer diversification across multiple stocks, bonds, or other asset classes.

By holding a diversified portfolio of investments, mutual funds can help to reduce the risk of losses from the poor performance of any investment(s).

Management

Investing in individual stocks requires time and expertise to research and analyze companies, industries, and market trends.

Mutual funds are managed by investment professionals who make decisions on behalf of investors, based on their expertise and analysis of market conditions.

Fees and expenses

Buying and selling individual stocks typically involves paying commissions and other fees to brokers. Mutual funds, on the other hand, charge fees for management and other expenses.

The fees and expenses associated with mutual funds can vary widely. It’s important to research and compare different funds before investing.

Liquidity

Stocks are generally more liquid than mutual funds. This means they can be bought and sold quickly and easily on stock exchanges.

On the other hand, mutual funds are priced once a day and can take several days to settle after a sale. This can limit their liquidity in certain situations.

The main difference between stocks and mutual funds is that stocks offer direct ownership. They have the potential for higher returns but with greater risk and volatility.

Mutual funds offer the diversification, professional management, and potentially lower risk and volatility but with slightly lower potential returns.

Risk Factor in Mutual Funds v/s Stocks

Investing in mutual funds and stocks carries different types of risks.

When you invest in a mutual fund, you are essentially investing in a diversified portfolio of stocks or other assets that are managed by a professional fund manager.

This means, when you invest in a mutual fund, you’re giving your money to a professional manager who invests it in a bunch of different companies.

This can help reduce your risk because if one company does poorly, it won’t affect your investment too much. But, if the overall stock market does poorly, your mutual fund investment could still lose value.

When you invest in a stock, you’re buying a piece of ownership in one company. This means that if the company does well, your investment could go up in value. But, if the company does poorly, your investment could lose value. 

This is riskier than investing in a mutual fund because your investment depends on just one company instead of many.

Investing in a mutual fund is considered safer than investing in individual stocks, but it may not offer as high of returns. The best choice for you depends on your goals and how much risk you’re comfortable with.

Returns from Mutual Funds v/s Stocks

The returns you can expect to get from mutual funds and stocks can vary widely, and it’s difficult to make a direct comparison because they are different types of investments.

When you invest in a mutual fund, your returns will depend on the performance of the underlying assets held by the fund. 

Mutual funds can invest in a variety of assets such as stocks, bonds, and real estate, and the returns will depend on how well those assets perform over time. 

Mutual funds are considered to be a more conservative investment option than stocks, and they tend to offer more modest returns over the long term.

When you invest in individual stocks, your returns will depend on the performance of the specific companies you have invested in. 

If the company does well and its stock price goes up, your investment could also increase in value. 

However, your investment could lose value if the company does poorly and its stock price goes down. Stocks can offer higher returns than mutual funds, but they are also considered to be a riskier investment option.

Mutual funds are generally considered a more conservative investment option that can offer more modest returns over time, while stocks can offer higher returns but are also riskier. 

The best choice for you depends on your investment goals and risk tolerance.

In Conclusion

We are sure you have financial goals that you want to plan for in the future. When you design your financial plan in line with these goals, remember to pick the investments that align with your goals.

Now, that you understand the difference between mutual funds and stocks, we hope you make an informed decision.

At Vittae, we learn about you, our client, and also conduct a risk assessment test to understand how much risk you can afford to take.

These details help our certified Financial Experts give the perfect advice to achieve your financial goals, sustainably.

We know it can seem a little overwhelming, but trust us. Take the first step towards investment and kick-start your journey to financial freedom.