Investors are often torn between deciding the right investment avenue for their portfolio. One such common dilemma faced by a majority of investors is choosing between mutual funds and stocks. This article will walk you through both the investment options and help you with your investment decision.
Why are mutual funds better than stocks?
Following are some of the reasons why mutual funds have an edge over stocks:
- Professional Management
Leveraging the knowledge and expertise of a fund manager to earn significant returns is one of the key reasons why individuals consider to invest in mutual funds online. Investments in stocks without prior knowledge about the working of the financial markets can prove to be quite disastrous. It could even quickly drain away your capital. Hence, experts often advise new investors to stick to mutual fund investments.
- Saving tax on mutual funds
If you sell your stock holdings within a year, you are levied with short-term capital gains tax (STCG) @15% p.a. Additionally, you also end up paying a securities transaction tax (STT) when you trade in stocks directly.
However, there is no such tax on the stocks that are traded by a mutual fund. This is one of the ways how you save tax on mutual funds. Also, u/s 80C of the Income Tax Act, ELSS funds helpan investor to save up to Rs46,800p.a by investing in ELSS mutual funds.
- Disciplined investment
Anothermain advantage of investing in mutual funds is the financial discipline it offers to its investors. An investor achieves financial discipline with the help of SIP (systematic investment plan). In an SIP investment, a fixed amount is periodically invested or a set period. You can also calculate the investment value by using the SIP calculator.
On the other hand, investing in stocks way can be quite tricky as every transaction would need to be timed and initiated by the investor himself.
- Cost of Investing
Unlike stocks, that can be bought individually, actively managed mutual funds require a small fee to be paid to the fund manager, known as the expense ratio. However, one often forgets the scale in the concept of ‘economies of scale’ that tips their weight in favour of mutual funds. Active management of funds indeed requires extra capital from the investor’s pockets, but owing to their large size, mutual funds only ask a tiny fraction of the brokerage from an individual shareholder. In the case of stocks, investors are required to pay the STT fees, that can be easily avoided in case of mutual fund investments.
- Investment Horizon
Mutual fund investments often require a decent tenure to generate considerate returns. This is because these investment vehiclesusually have a long-term growth trajectory.
Conversely, stocks can fetch you quick and substantial returns if you select the right stocks and successfully time the buying and selling part correctly.
Whether you decide to go withmutual funds or stocks entirely depends on your knowledge about the market and the amount of time and efforts you are willing to spare. Mutual funds can prove to be a great investment instrument if you are a newbie and aim for steady growth returns. However, if you are a stock market guru with ample time on your hands, investing in stocks is a better choice. Happy investing!