Difference between Mutual Funds Vs Stocks

Both stocks and mutual funds are popular investment avenues in India. However, the difference between stock and mutual fund investments is not limited to the process for making these investments. It is important for potential investors to know about the differences between these two types of investments, so they can gain better insight into both options and make an informed investment decision.

Table of Content

What Is Stock Investment?
What Is Mutual Fund Investment?
Mutual Funds Vs Stocks
Mutual Funds Vs Stocks: Which Is Better for You?

What Is Stock Investment?

Stock investment refers to buying shares or equity of a company. Stocks are a unit of proportional ownership in the capital of a publicly traded company and entitle investors to the assets, profit, and loss of the company equally. There are mainly two types of stock – common and preferred. Common stockholders have voting rights in the company’s decision-making and may receive dividends. On the other hand, preferred stockholders generally receive fixed dividends, but their voting rights are limited.

The price of a company’s stocks is determined based on the supply and demand in the market, the dynamic of which is influenced by several company-related factors, like its performance and growth, the overall market sentiment, and the economy.

What Is Mutual Fund Investment?

Mutual funds offer a collective investment option. Mutual fund investment pools money from multiple investors to buy a diversified portfolio of various securities, like bonds, stocks, and other assets. The portfolio may include different types of mutual funds, like debt funds, equity funds, hybrid funds, etc., each of which comes with its own set of characteristics and risks.

This allows for risk diversification and easy achievement of financial goals. Mutual fund investments allow investors to partake in the profits and losses accrued by their fund portfolio. While an investor has to monitor and manage their own stock investment, mutual fund investments are managed by fund managers.

Mutual Funds Vs Stocks

Before choosing between mutual funds vs stocks for making an investment, it is important to understand how they differ from each other:

Here, you buy "units" of a pooled investment fund. There isn't a fixed number of underlying shares per unit—instead, you invest in terms of those units. The amount you invest determines how many units you receive, with each unit's value defined by the fund's NAV (Net Asset Value), which changes every day.

Parameter	Mutual Funds	Stocks
Definition	Investors do not directly own individual securities. They own shares in the fund itself.	Stocks represent ownership shares in a company. Investors are shareholders who have a claim on the assets and earnings of the company.
Denomination	Investors buy units of a pooled investment and the amount you invest determines the number of units you get.	Each stock represents an individual share of the company, and these shares typically have fixed face values.
Numeric Value	Mutual funds have a net asset value, updated once a day after market closing.	Stocks have a defined numeric value, which is the market price of an individual share, updated continuously during market hours.
Issuance	There is no possibility of original issuance. Units come from the pooled capital.	Original issuance is always a possibility, as new shares can be issued by companies directly.
Associated Risk	Risk is associated with mutual funds, but it is relatively lower due to diversification.	Stocks come with a higher level of risk due to company-specific volatility.
Who Should Invest	Mutual funds are managed by professionals and are suitable for seasoned as well as new investors.	Seasoned investors who have sound market knowledge generally have the chance of performing better in stocks.
Diversified Investment	Mutual funds offer more opportunities for diversifying an investment across various assets.	Diversifying the investment is possible only if the investor actively selects different stocks.
Potential for Returns	Depending on the scheme, mutual funds provide moderate to high returns.	The returns with stock investment are relatively higher, along with the associated risk.
Requirement of Market Knowledge	With fund managers making day-to-day decisions, it is not necessary to have market knowledge. However, it can help in mutual fund selection.	To effectively research and manage stock investments, investors must be well-versed with market forces.
Cost of Trading	The costs are spread across multiple investors, capitalising on economics of scale, resulting in lower costs per individual.	The trading cost is higher, as the costs of frequent stock trades can add up quickly for an individual investor.
Process	Mutual fund investments can be initiated within a few minutes and are relatively more convenient to make.	Stock investments must be made through demat and trading accounts, making the investment process more complex.
Tax Benefits	Numerous mutual funds schemes come with tax-saving benefits for investors.	Investors are required to pay capital gains tax when they sell their stocks.
Investment Horizon	Mutual funds tend to reflect better results when invested for the long run.	Stock investments can be short-term as well as long-term.
Restrictions	Investments can be made into a diversified portfolio across various asset classes.	Stock investments have limited asset classes, unless the investor diversifies them manually.
Control	Mutual fund investors do not have a lot of control over their investments.	Stockholders have relatively more control over their investment.
Systemic Investment	Mutual fund investments can be made through systemic investment plans.	Stocks do not offer the feature of systemic investment plans.

Mutual Funds Vs Stocks: Which Is Better for You?

To decide whether you should invest in stocks or mutual funds, several factors must be taken into consideration, such as your investment goals, financial situation, and your risk tolerance.

Mutual fund investments can be the better choice for novice investors who have limited knowledge of the stock market. The professional management that comes with mutual funds is a great way for inexperienced investors to diversify their investment portfolio and potentially enhance their returns. Mutual fund investments are also a better option for investors who have low risk tolerance and are looking for more stable returns. The diversification offered by mutual funds helps reduce risk, while the option to invest via systemic investment plans (SIPs) or systemic transfer plans (STPs) makes for a more stable investment strategy.

It is easy to see that investing in mutual funds is a great way to build wealth and meet other financial goals according to your own risk appetite. Muthoot Finance is one of the leading platforms in India for mutual fund investments and offers a wide range of financial avenues for you to consider. These include debt funds, equity-linked schemes, balanced funds, liquid funds, tax-saving schemes, and SIPs. Enjoy the benefits of experience, expertise, and reliability while diversifying your investment portfolio with Muthoot Finance – India’s No. 1 Most Trusted Financial Brand.