Investing either in mutual funds or stocks will help you earn inflation-beating money returns. You will have to take a decision of investment based on the amount of risk that you can take. In order to have higher benefits, you should be willing to take higher risks. In this article, we will discuss with you the particulars that come into the scenario for stock investment as well as in mutual funds. Read on to know everything about them before you make your decision on investment.
Understanding Mutual Funds and Stocks
When mutual funds and stocks are compared on the basis of risk factors, the latter poses many risks as compared to the former. Basically, the risk in mutual funds is spread across and, thus, is reduced as there is a pooling of various stocks. However, when you plan on investing your money in the stock market, you will have to conduct extensive research before you do so. Particularly, when you are a novice investor, you need to be extra cautious.
You can conduct your research online from different platforms. In case of the mutual funds, the experts will do the research work for you, and a professional fund manager is appointed for you, who will manage your investment pool. However, this service is not free, and you will have to pay an annual management fee that is charged by the fund houses.
Investment From a Novice Point-of-View
If you are a new investor with little to no experience with stocks and mutual funds or haven’t experienced any risk factors that are subjected in the financial market, it is advisable that you started your investment with the equity funds first. The equity funds are invested along with the mutual funds in which the risks are comparatively low, and also, an expert makes all the decisions for you. These professionals have ample knowledge in analyzing and interpreting financial data to gauge out the prospect of investment.
How Can You Track Your Investment?
The best part about investing in a mutual fund is you have the leverage of a fund manager who has extensive experience and expertise in the finance market. Whether it is about picking up the correct stocks, or monitoring them and making the allocations for the shares, your fund manager will take care of it, and you won’t have to do a thing. However, when you invest in the stock market, everything has to be done by you –you will have to pick the efficient stocks for investment, you will have to monitor them, and allocate your investment, which in a way puts your money at risk if you are not an expert in the subject.
Returns and Risks
In this article so far, we have established the idea that investing in mutual funds is comparatively less risky as you can have a diversifying portfolio. On the other hand, the stocks are subjected to vulnerability and fluctuations faced in the finance market, and you need to know that the performance of one stock cannot be compensated by the other.
The Gain in Tax
If you sell your stocks within one year of their purchase, you will be levied with the short-term capital gain tax by 15%. However, when you are investing in mutual funds, there aren’t going to be any capital gains on the stocks that your fund is going to sell. This is going to be a substantial benefit for you when you plan on investing in mutual funds. Also, the tax amount that has been saved is available for you to invest it further and, therefore, make way for more income generation.
The Cost Involved in Investing
Although you will have to pay a fee to the mutual funds’ manager, which is not in case you buy stocks individually, the economies of scale are also taken into consideration. The active management of the funds, indeed, is an affair that cannot be served to you free of cost. However, as a matter of fact, mutual funds are significant in size, and there are many investors like you involved in one particular fund. Therefore, the brokerage charges that you would be paying will be a fraction of the amount. When you are investing individually in the stocks, you will have to pay the Demat fee, which can be avoided in the case of investing in mutual funds.
While every investor’s situation is different, and there are a few generalities on whose basis, you can make your decisions. In this article, we have made sure to mention the essential factors that can affect your choice of investing either in the stock market or in mutual funds. If you are willing to take higher risks, indulge deeply in researching the stock market, and avoid the extra charges of paying it to the fund manager, you are free to invest in stocks. Otherwise, we would suggest you went for mutual funds.