Mutual Funds vs. Stocks: Which is right for you?
Mutual funds and stocks are the most common term these days. Whenever you heard investing, it is either a mutual fund or stocks. Do you get confused between stocks and a mutual fund? Is it hard to choose which investment is better for you?
In this article, we will understand why mutual funds and why stocks.
Let us begin with the definition of a Mutual fund, it is the company that pools money from investors and invests the money in different securities like bonds, stocks, debt, etc. whereas stock is a unit that represents the ownership of a company also known as share and equity.
We generally say investment in a mutual fund but it is an investment with a mutual fund or investment in a mutual fund scheme. A mutual fund is a company whereas a mutual fund scheme gives the option of investing in a diversified portfolio.
There is a misbelief that investment in a mutual fund scheme is a long-term investment. This is not true. You can invest in an overnight mutual fund scheme that intends to provide investment in securities with high liquidity having the maturity of one business day. You can invest in a mutual fund scheme based on your investment objective.
It is not mandatory to open a Demat accountif you want to invest in a mutual fund scheme. But if you have one it becomes easy as you are no more required to be dependable on your broker, you can easily make a selection of your mutual fund scheme and compare the same with another scheme.
Why mutual fund
Professional management- It provides you professional assistance, it is not easy to daily track your portfolio and keeps check on the same, mutual fund provides mutual assistance which manages your fund irrespective of your investment amount.
Portfolio diversification- As Warren Buffet said "all eggs are not in the same basket", one needs to have a diversified portfolio that is if there is one stock that is not performing well, the other stock balances it by giving good returns. A mutual fund provides the facility of a diversified portfolio by reducing the risk in investment. An investor can benefit through a diversified portfolio even if the amount of investment is 50o.
Transparency- investor gets updated about the scheme, its portfolio, any information that affects its investment decision, SEBI itself regulates this and assure that everything is crystal clear and nothing is hidden. Even if you are a prospective investor, you can access this information with the following documents: scheme information document (SID), Statement of additional information (SAI) and Key information memorandum (KIM). One can find them on the website of SEBI and respective AMC.
Liquidity- we have already discussed the criteria of liquidity where we can select the mutual fund scheme on basis of investment objective.
Tax benefit- if you are investing in a mutual fund scheme you are not liable to pay tax on income earned through a mutual fund, by investing in some specified mutual fund scheme you can get a deduction of up to 150000 from the income.
Every coin has two sides, similarly, a mutual fund has its limitation.
Customised portfolio- Being an investor you cannot customize your portfolio, you have to invest with the mutual fund scheme portfolio.
Risk- There are some risks associated with the mutual fund.
Interest rate risk: the interest rate is the return that an investor gets on investing in the mutual fund. The interest rate and the price of a mutual fund are inversely proportional as the interest rate rises the prices of fixed income securities fall, when the interest rate falls the price rises.
Default risk- this risk arises when the company defaults in payment of the amount.
Some other risks are economic risk, political risk, dividend risk and reinvestment risk.
Another option which most of them choose to invest is in Stocks.
Investment in stocks or shares is a direct investment you need to choose shares of a particular company. Before choosing stocks one needs to do the stock analysis that is how the stock of a particular company is performing? how much return it has given in previous years? whether the sector company belongs to is performing well or not? The management of the company, its brand image, the key personnel of the company. All these need to be researched before investing hard-earned money.
Stock analysis is studying and evaluating the past and current data so that investors and traders can make buying and selling decisions. The analysis involves fundamental analysis and technical analysis.
Stock screener
helps you to make this analysis as all the data whether past or present are available. Ticker by finology makes it easy for you as you can get all the essential details of the company, important charts tracking the performance of the company, important ratios, quarterly and annual results, and peer comparison. The ticker is free, so you can avail its benefits and make your decision more reliable Ticker plus has been launched to give extra benefits to its users with some exclusive additional features.
Stock/ shares have their benefits
Liquidity- stock is a liquid asset it can easily be converted into cash. With just one click you can easily convert the stocks into cash when we talk about other assets, it is not the same.
Own portfolio- investor or trader can invest in their portfolios i.e., they can invest in the shares they are willing to do so. They need not compromise their choice. The portfolio can be modified whenever they desire to.
Returns- stock market provides the highest return compared to other investment instruments. It provides a return on long term investment from 15-18%.
The major reason people avoid investing in the stock market is due to its volatile nature. The stock market is highly volatile, if the stock analysis goes wrong one can even make losses. So proper knowledge and analysis in stocks will lead to higher returns.
In this article we have discussed mutual fund and stock, now it is your decision where to invest. If you are a risk-taker then you can invest in the stock market and you want to play safe and do not want to risk your hard-earned money then a mutual fund is the best option for you.
Always remember two rules whether you invest in stocks or mutual funds.
Rule 1: Never lose money
Rule 2: Never forget rule number 1.
S. Vishwa is a web marketing analyst at Finology Ventures. With 5+ years of web marketing experience, joined a Fintech company to help people to learn and earn more.
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