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.
Understanding Stock And Mutual Funds
Stock investment refers to investing in company shares directly, whereas mutual funds create a pool, collecting funds from different investors before investing in the market. When an individual investor invests in the stock market, he/she needs 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.
Read More About What is Mutual Fund?
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.
| Equities | Mutual Funds | |
| Definition | Equity investment indicates partial ownership in the company | Mutual fund investors invest in a pooled fund that is spread into various securities |
| Risk | Higher risk | Low risk than equities due to diversification |
| Return | Potential for high return | Moderate returns with lower risk exposure |
| Diversification | Limited diversification | Broad and instant diversification |
| Management | Equities are managed by individual investors investing in them | Usually managed by professional fund managers backed by a team of market researchers |
| Research | Depends on the research abilities of individual investors | Depends on the fund manager’s expertise |
| Control | Gives more control over where you invest | Less control and managed by fund managers |
| Transaction costs | Involves buying and selling fee | Has an expense ratio and entry and exit load |
| Investment amounts | It is flexible | There may be a minimum investment amount threshold |
| 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.
Main Differences Between Equity Investment And Mutual Funds Are Below
Risk
Mutual funds suits investors with a low-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 investment.
Returns
Mutual funds investment generates a decent return over a period of time, but equity investment generates a significantly higher return than any other investment option over a short period.
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 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 loss and gain 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 funds investment also involves cost, but it is less than the cost associated with equity investment.
These are some of the differences between equity investment and mutual funds. Both come with a few pros and cons.
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, risk-averse investors, who don’t want to invest time in researching market but want a steady return, prefer mutual fund investment.
Several investors prefer mutual funds because of the following reasons.
- It is easier to invest in the MF. If you are a new investor, with little or no experience in the financial market, mutual funds are a better investment route
- Mutual funds are relatively stable than highly volatile equity investment
- 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
- Mutual funds offer portfolio diversification at low cost
- Mutual fund companies appoint professional fund managers to manage your investment
- You get to invest in innovative products directly and receive attractive returns
- Highly liquid like a stock investment but not as risky
- Lower transaction cost compared to equity investment
- Capital gain from mutual funds is tax exempted
However, mutual funds investment isn’t free from downsides. Here are a few cons of investing in mutual funds.
- Mutual funds investment doesn’t give you the freedom to select company stocks. Instead, you invest in a common fund with other investors
- You have less control over where your money is getting invested and don’t enjoy direct ownership of your portfolio.
- You can’t always exit an MF scheme at your will, and early exit may attract charges and taxes. Stock market investment is highly liquid.
- 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.
- It comes with several charges like entry and exit loads, management fees and the like, which increase the cost of investment.
In The Nutshell
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 funds, check the status of your investment regularly and adjust it to your financial goals.
FAQs
What is the difference between equity and mutual funds?
Equity refers to ownership in individual stocks of companies, while mutual funds are pooled investments that can include a combination of stocks, bonds, and other securities.
Which one offers better diversification: equity or mutual funds?
Mutual funds usually offer better diversification compared to equity investments. Mutual fund companies pool money from multiple investors to invest in a variety of securities, which helps spread the risk. On the other hand, buying equities means holding shares of individual companies. This makes the returns susceptible to the performance of those specific companies.
What are the risks associated with equity investments?
Equity investments are high-risk investments compared to mutual funds. The price of individual stocks can be highly volatile, influenced by factors such as market conditions, company performance, and economic trends.
How does professional management differ between equity and mutual funds?
Equity investment depends on the research abilities of individual investors. On the other hand, mutual funds are professionally managed by experienced fund managers.
