Stocks vs Mutual Funds: Where Should You Invest?

Every investor’s investment journey eventually comes down to one question- Stocks vs Mutual Funds, what to choose?

There’s no correct answer. It all depends upon your financial goals and preferences. 

Which is why, you should carefully curate your investment portfolio. A balanced portfolio should be your ultimate goal.

But…for the sake of understanding, let’s get to know both investment avenues a little better. Shall we?

What are Stocks?

Stocks aka shares are the units of a company. Upon buying them, you officially become a shareholder of a company. 

Stocks deliver returns in terms of gains and sometimes dividends when the company performs well. 

When you invest 1,00,000 in a company with a stock price of 1000, you will get 100 shares of the company. 

You need a demat account to invest in stocks. 

What are Mutual Funds?

Mutual funds are a collection of stocks of various companies. Apart from company stocks, funds also invest in other asset classes such as debt and money market securities.

Now, if you invest those 1,00,000 in a mutual fund of a NAV 1000, you get 100 units of a fund. These 100 units are a combination of multiple companies, enabling instant diversification.

You do not need a demat account to invest in mutual funds.

Read along for a detailed comparison below…

Stocks vs Mutual Funds: A Detailed Comparison

1. Portfolio Diversification

Diversification is important to ensure a stable and sustainable portfolio. 

Diversification Via Stocks: You cannot invest all your money in one company. Having stocks from multiple companies is one way to introduce diversification. When one company underperforms, the other companies will keep the portfolio moving.

In order to achieve that, you have to study the market, analyze the performance of all the companies, time the investment, and keep track of all your stocks. 

It can surely be achieved with the right resources and knowledge, which individual investors may not have. 

Result? A long tail of underperforming stocks. Poor returns. 

Watch a quick overview of why too many stocks can slow down your overall portfolio growth. 

Diversification Via Mutual Funds: Mutual funds offer instant diversification. The fund managers use their expertise and resources to analyze the market trends. Therefore, the fund comes with a collection of stocks carefully picked by the experts. 

You can further diversify your portfolio by investing in various categories of equity and debt funds. 

The only drawback is, you do not get to choose the underlying stocks. However, you can compare the performance of a mutual fund to decide which fund aligns with your goals. 

Here’s how to ensure true diversification via mutual funds

2. Associated Risk 

No investment is safe. You cannot avoid the risk but you can balance it. 

Stocks carry higher risk compared to mutual funds. The returns on your portfolio depend on the performance of the specific stocks that you have bought. 

Mutual funds, on the other hand, have fairly diversified, well-researched stock holdings and can also balance the risk by asset allocation across equity and debt. The underlying assets keep moving up/down with the market. You can beat both volatility and inflation by staying invested for a longer horizon. 

3. Investment Amount

Let’s take a simple example- you have 10,000 to invest in. 

With 10,000, you’ll be able to acquire a limited number of good stocks, probably 3 to 4. Or, you may not be able to buy even a single stock of expensive companies. 

For example, MRF's stock price is more than 1 lakhs. Honeywell Automation- 37256. Nestle India- 24000. P&G-17649. 

Even if you end up buying a couple of stocks, the entire performance of your portfolio will depend upon those stocks. 

However, if you invest those 10,000 in a mutual fund, you will be able to invest across market cap without worrying about the stock price. The corresponding units of your investment value will be allocated to you. 

You can either invest a lumpsum amount or start a monthly SIP. Usually, the minimum threshold of a lumpsum investment is INR 5000 and the minimum SIP amount starts from INR 100 per month. 

4. Taxation on Stocks vs Mutual Funds

You have to pay tax on gains earned via stocks and mutual funds.

Stocks aka listed equity have the same tax rules as equity mutual funds. Investments redeemed before 12 months will attract a 15% Short-Term Capital Gain tax. Long-Term Capital Gains (investments redeemed after 12 months) are taxed at 10% above 1 Lakhs. 

Returns on debt mutual funds are considered as income. Both long and short-term capital gains are taxed as per investors' tax slab.

You can benefit from the tax deduction of up to 1.5 Lakhs (under section 80c of the IT act) in a financial year by investing in ELSS mutual funds. Stocks do not offer any tax deduction benefits.

Stocks vs Mutual Funds: Who Should Invest in What?

Who Should Invest in Stocks?

Stocks are for investors who want to have complete control over their investments. They can pick the companies they want to invest in. 

However, picking stocks is not as easy as it sounds. Say you have 1,00,000 to invest. How would you distribute them among multiple companies? You’ll have to keep track of market trends, performance updates on companies, and a lot more. 

Stocks can be risky and you may not know how to balance that risk. And even if you keep investing in stocks, soon it’ll become difficult to keep track of. 

So, if you have time, research capability and knowledge to monitor all your stock holdings, only then consider buying individual stocks. 

Who Should Invest in Mutual Funds?

Mutual funds are for everyone. From beginners to savvy investors, anyone can craft a portfolio as per their risk tolerance and financial goals. 

You can choose the funds aligning with your risk appetite and instantly diversify across various asset classes.

Investors looking to invest a small amount each month can create an SIP. You can also consider investing in ELSS mutual funds for tax optimization.

Let your investment in mutual funds grow over a longer horizon so you can even withdraw a fixed income via SWP. 

Final Words

It all narrows down to what your preferences are and how much time you have. Both investment avenues have their benefits and limitations.

You must wisely choose where you want to invest your hard-earned money. 

The first step would be to craft your financial goals and the time in which you want to achieve them. Work backwards to plan your investments accordingly. 

Consider talking to your wealth manager. If you don’t have one, VNN Wealth experts can review your portfolio and guide you through the process.