Difference between investing in stocks and mutual funds

Investing in equities for the long term is one of the best options for wealth creations but that doesn’t mean you have to buy and trade in individual stocks, you can also get that exposure through equity mutual funds.
If equity is a parent, equity mutual funds are the children. In equity investing the investor is himself the driver whereas in mutual funds the fund manager plays the role of the investor’s chauffer.

Here are some key points to take note of:

1. Diversification - Stock investing results in concentration of investment in a few stocks whereas mutual fund helps to diversify into various stocks. Equity Mutual Fund schemes usually hold between 30 to 50 stocks.
2. Professional management - Stock selection is a very tedious process and needs expertise which can be costly and time consuming. Mutual funds have a team of analysts and fund managers who invest in stocks after thorough research.
3. Tax advantage - Trading in stocks results in short and long term gains & requires keeping records of dividends, rights, bonuses and other corporate benefits. In mutual fund one need not maintain any such records for corporate actions. The fund manager books profit and trades in equity without affecting the taxation for the mutual fund investor. The investor simply has to show the purchase & sale transactions of mutual funds.
4. Cost - Trading in stocks has various costs like demat charges, brokerage, exchange fees, turnover tax, etc. which is not there in mutual funds rather they are inbuilt in the NAV.
5. Discipline in investing - One can do a very disciplined investment in mutual funds through SIP & STP where a fixed/variable amount is deducted automatically on prescribed dates without any human intervention. Such facility is not there in stocks.
6. Stay up-to-date with current events - It is a must to keep updated on current events as it causes fluctuation in prices. In mutual funds such tracking of corporate news is done by the analysts and fund manager. Booking profit / loss on equity is a must and this requires to keep one self updated on the latest developments & news about the companies in which one has invested.
7. Saves time - Investing in mutual funds saves a lot of time as it is easy, fast and has option of digital transactions. Stocks requires a lot of formalities to be followed regularly.
8. Regulatory compliance - Mutual funds are governed by strict laws of SEBI and other government machinery keeping the system under various checks. Direct equity investing requires the investor to comply with those regulations.
9. Stock selection - There are more than 5000 stocks listed on the exchanges. Selection of few stocks for investments is impossible & difficult. In the case of mutual funds, the fund manager with the help of analysts selects the stocks to invest in. They also track the performance of those companies and their respective industries.
10. Profitability – An investor invests in various stocks and all of them don’t perform together. There may be some stocks that take time to move after investment. In fact, the returns from some stocks may be less than others and are held for long-duration, sometimes years. In mutual funds, the returns are combined (comprising of the entire portfolio of stocks the fund has invested into)
11. Sector wise allocation - One can choose to invest in a particular sector. This is easier in the case of mutual funds. For example, if one wants to invest in pharma stocks one just can invest in any pharma fund. This saves the investor from selecting a good pharmaceutical company and understanding their product.

However, one can always allocate a portion of the investible capital into quality stocks for enjoying the thrill of stock trading as mutual funds investment is passive in nature.

Views are personal: The author is Rohit K Sonthalia of SFIC group of companies, Kolkata

Disclaimer: The views expressed are of the author and are personal. TAML may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.