Mutual fund investments and direct stock market investment [or shares] are two very distinct financial products that are often misinterpreted as identical investment option. Investors often face the dilemma of deciding where to invest their hard-earned money. Mutual funds or stocks?
This article aims at providing a mutual fund investment guide and solving this dilemma.
How mutual funds are better than direct investments in stocks
Here are a few reasons why investing in mutual funds is a better investment option than direct investments in stocks:
Professional Management
One of the key reasons why investors prefer to invest in mutual funds is to leverage the expertise and knowledge of a mutual fund expert – fund manager to earn substantial returns.
Investment in stocks without prior experience and knowledge about the working of the financial markets can prove to be catastrophic. This can easily result in exhausting one’s savings. Hence, experts often advise investors to invest in mutual funds online if they do not have a thorough knowledge of the markets and desire to keep their money in safe hands.
Diversification
Unlike a direct investment in stocks that invest in individual equities, mutual fund investments strive to invest in multiple asset classes to hedge the investment portfolio during volatile market conditions. Thus, mutual funds help to diversify the portfolio while mitigating one’s risk profile.
Convenience
Purchasing and selling stocks entails ample time and formalities, something that is absent in mutual funds. In case of mutual fund investments, these formalities are done by the AMC [Asset Management Company] or the fund house that manages the fund, for which they charge a nominal fee. What’s more, mutual funds do not necessitate an investor to regularly monitor and time the market. An investor can easily put their capital in mutual fund schemes for a long time and earn decent returns.
Tax-Saving Benefits
When it comes to stocks, income generated from equity investment is taxable at the hands of the investor. Additionally, there are no tax benefits. However, there are a few types of mutual funds that allow an individual to avail tax-saving benefits. ELSS (Equity-Linked Savings Schemes) are tax saving mutual funds that are eligible for a tax deduction of up to Rs 1.5 lac u/s 80C.
Overseen by the market regulator
Unlike stocks, mutual fund houses are subjected to certain restrictions and scrutinies by the national market regulator- SEBI [Securities and Exchange Board of India].
Where should you invest?
Mutual funds or stocks? Which one is the ideal investment option? There is no right answer. Mutual fund investments provide us with peace of mind when compared to stocks. Still, stocks have the potential to generate exceptionally higher returns than mutual funds.
Lastly, it goes without saying that the best returns would be generated when the investors stick to their investments for the long term. Whether you decide to go forward with mutual funds or stocks, entirely depends on your financial goals, investment horizon and risk profile. Happy investing!