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Stock investment and mutual funds, both are designed to help investors grow wealth by investing over a long period. However, they are exactly not the same. Knowing the difference between investing in shares against mutual funds will help you determine the best investment option.
Key Takeaways
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Investing in equity can result in higher returns but also have higher volatility, whereas mutual funds offer moderate but stable returns.
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Mutual funds carry comparatively lower risk because they offer broader diversification than equities.
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Investors get direct control and partial ownership in the company through equities but the same is limited in mutual funds.
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Investing in equities requires constant monitoring and extensive research, whereas mutual funds are managed by fund managers, making them ideal for beginners.
Understanding Stock And Mutual Funds
A stock or equity investment refers to investing in company shares directly, whereas in mutual fund investments, a pool is created with funds collected from different investors before investing in the market. When an individual investor invests in the stock market, they need to perform extensive research on the market and stock performance before selecting shares. But in case of mutual funds, there is usually a fund manager who does the job for you.
Here’s a quick look at how both these investment options vary from each other.
Mutual funds:
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They can offer moderate returns with a lower risk factor due to portfolio diversification.
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The broad diversification of mutual funds helps reduce the impact of assets that do not perform well.
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Active mutual fund investments are managed by a credible team of fund managers and market researchers.
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You can rely entirely on fund managers and need not take specific investment decisions within the fund.
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You have to pay an expense ratio to the fund house for managing your fund, and there will be an exit load charged if you plan to redeem your units before the holding period of the fund expires.
Also, read What Are Mutual Funds here
Stocks:
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Stocks or equity investments can generate high returns but with a higher risk factor.
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Diversification is lower as you can buy stocks of limited companies only.
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In equity investments, you need to manage your own portfolio.
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It is important to study the market extensively to avoid potential losses due to volatility.
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As an investor, there is a higher control on the stocks you invest in.
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Selling and buying stocks may require you to pay some charges. This varies from one broker to another, so you need to choose a discount broker offering affordable charges.
Also, read Stock Market Basics: Guide for Beginners
Mutual Funds vs Stocks
The primary difference between equity and mutual funds is that investing in equity involves buying stocks in a single company. On the other hand, mutual funds allow you to invest in a diversified portfolio containing multiple stocks. In addition to this, there are several other points that you should keep in mind while investing.
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Equities |
Mutual Funds |
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Definition |
Equity investment indicates partial ownership in the company |
Mutual fund investors invest in a pooled fund that is spread into various securities |
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Risk |
Higher risk |
Low risk than equities due to diversification |
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Return |
Potential for high return |
Moderate returns with lower risk exposure |
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Diversification |
Limited diversification |
Broad and instant diversification |
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Management |
Equities are managed by individual investors investing in them |
Usually managed by professional fund managers backed by a team of market researchers |
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Research |
Depends on the research abilities of individual investors |
Depends on the fund manager’s expertise |
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Control |
Gives more control over where you invest |
Less control and managed by fund managers |
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Transaction costs |
Involves buying and selling fee |
Has an expense ratio and exit load |
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Investment amounts |
It is flexible |
There may be a minimum investment amount threshold |
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Liquidity |
Highly liquid |
Usually liquid, but it might depend on the fund type |
When deciding between stocks and mutual funds, individuals should consider their investment goals, risk tolerance, and time commitment and consult a financial advisor to make an informed decision.
Key Differences Between Mutual Funds and Equities
Knowing the difference between equity and mutual funds is important before you invest in either of the investment options. While mutual funds work for all investors, aggressive investors willing to take a higher risk can look at equities or stocks. The volatility of the stock market makes it riskier. On the other hand, mutual funds offer a diversified portfolio, helping you mitigate losses with ease.
Here are the key differences between mutual fund and equity that you should be aware of.
Risk
Mutual funds suit investors with a lower risk profile. In mutual funds, the risk spreads across all participants, and hence, each investor carries only average risk. Stock market investors are more aggressive and undertake higher risk for a higher return. In terms of risk, mutual funds are ‘safer’ than equity investments.
Returns
Mutual fund investments can generate a decent return over a period of time, but equity investment can generate a significantly higher return than other investment options over a short period. However, with the potential for higher returns, comes higher risk.
Volatility
Stock market is exceptionally volatile, which also makes it riskier. Share prices in the stock market can skyrocket or plummet within a short span. It demands that investors monitor their investment in the market continually. Against that, investing in mutual funds is more stable because you invest in a diversified portfolio, and losses and gains are spread across the shares.
Convenience
If you are among those who aren’t ready to invest full-time in monitoring market movement and checking investment performance, then mutual funds are right for you. Mutual funds enlist the services of professional fund managers, making it extremely convenient for general investors and beginners. On the other hand, success in share investment depends on the ability and knowledge of individual investors.
Cost
Investing in the stock market involves high transaction fees (sometimes one trade involves several transactions, which increases the cost further). If one is not careful, sometimes these costs of transactions can exceed the gain from the trade. Mutual fund investment also involves cost, but it is less than the cost associated with equity investment.
Now that you know the difference between equity and mutual funds, you can invest based on your risk appetite, investment goals and time horizon.
Mutual Funds Vs Equity – Which Is Better?
Whether you opt to invest in mutual funds or equities depends on your personality as an investor. If you are a risk-taker, want to grow your wealth within a short time and prefer high liquidity, then equity investment is suitable. Similarly, investors who don’t want to invest time in researching the market but want a steady return, can look at mutual fund investments. Several investors prefer mutual funds because of the following reasons.
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It is easier to invest in mutual funds. If you are a new investor, with little or no experience in the financial market, mutual funds are a better investment route
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Mutual funds are relatively more stable than highly volatile equity investment
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MF return doesn’t get impacted by the performance of one company, rather depends on the overall performance of the fund, designed to generate a stable return on investment. So your investment remains shielded from direct financial market risks
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Mutual funds offer portfolio diversification at low cost
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Mutual fund companies appoint professional fund managers to manage your investment
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You get to invest in innovative products directly and receive attractive returns
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Highly liquid like a stock investment but not as risky
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Lower transaction cost compared to equity investment
However, mutual fund investment isn’t free from downsides. Here are a few cons of investing in mutual funds.
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Investment in mutual funds doesn’t give you the freedom to select company stocks. Instead, you invest in a common fund with other investors
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You have less control over where your money is getting invested, and don’t enjoy direct ownership of your portfolio.
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An early exit may attract charges and taxes. Stock market investment is highly liquid.
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Mutual funds are designed to generate a return in the long run and require you to stay invested for a specific time to see the investment grow.
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It comes with several charges like exit loads, management fees and the like, which increase the cost of investment.
Mutual Funds Calculator
You can use a mutual fund calculator or SIP calculator to compute potential returns that you stand to earn from a mutual fund investment. All you have to do is enter the initial investment amount, the time period you plan to invest in and expected rate of return. You can get the expected maturity amount within seconds.
Using this free online tool, you can compare multiple mutual fund options and choose one that best aligns with your investment goals. On the Angel One website or app, you can get access to a diverse range of investment calculators, such as Simple Interest Calculator, NPV Calculator, and many other tools. Visit the portal and use these online tools to predict your investment returns effortlessly.
Conclusion
If you are skilled and experienced in the stock market, you can invest directly in equities for a higher return. Otherwise, it is recommended that you invest through mutual funds. No matter if you choose to invest in equities or mutual fund investment, check the status of your investment regularly and adjust it to your financial goals.