Most people are curious about the investment options available to them and want to learn more to enable themselves to save taxes. Those planning to invest for the first time want an easy answer on what to pick: mutual funds or stocks? To simply say that one is better than the other would be a generic statement. Every person has unique requirements and these two investment instruments offer distinct benefits.
Also, mutual funds and stocks are crafted for two different set of investors. Let's compare them so you can decide what's the best option for you.
Understanding stocks and mutual funds
Stocks happen to be far riskier than mutual funds. The risk in mutual funds is spread over a range of products. Investing in stocks requires investors, especially those just beginning, to do extensive research. In mutual funds, the research is done by experts as a professional fund manager is tasked with managing the pool of investment. But this service by a domain expert comes with an annual fee.
Investing as a beginner
New investors are advised to begin with mutual funds to get acquainted with the market. Also, the fund manager, with years of experience and the ability to analyse and interpret financial data, would be making the decisions based on his insights. With the fund manager doing the research, it is he who has to invest time while you can be passive. Those who invest in stocks have to track and analyse their investments themselves.
Risk vs return
As said earlier, mutual funds have the advantage of reducing the risk by diversifying an investment across a portfolio. Stocks, on the other hand, are vulnerable to market fluctuations, and the performance of one stock can't compensate for another.
If you sell your stock holding within a year from the purchase date, you will have to pay short-term capital gains tax at the rate of 15 per cent. But there is no tax on capital gains on the stocks that are sold by the fund, a substantial benefit. With mutual funds, you can claim tax benefits under Section 80CCG as well as 80C if you have an equity-linked savings scheme.
Investing in mutual funds requires 5-7 years to generate good returns. Stocks can give you good returns if you invest in the right ones and sell them at the right time.