Mutual funds vs Stocks: Which is Better?

Market-linked financial products like stocks and mutual funds offer a great way to let your money work for you and grow over time. But when there's information incoming from different directions, it's only natural to get confused, more so if you're new to investing. 

So, it's no surprise most investors often end up asking this question: which is better - stocks or mutual funds? But before we answer that, let's first break down the basics.

What are stocks?

A stock – or a company's "equity" – is a type of financial instrument representing your share in the company. When you purchase a company's stock, you invest money in a company share and become a partial owner of its earnings and assets.

What are mutual funds?

A mutual fund is a financial instrument that allows multiple investors to pool money and create a corpus. It is managed by an asset management company (AMC) through a fund manager, who decides when and where to invest the amount.

They can invest the money in bonds, money market instruments, equities, or other securities depending on the investment mandate – a set of instructions on how to use the pooled amount.

Additional Read: How to Invest in Mutual Funds

How do the two differ?

Now, let's come back to the question: which is better mutual fund or stock market?

Unlike stocks, funds cover a range of investments. Instead of investing in a single company share, funds are used to buy diverse products based on the market conditions. Naturally, the overall risk of funds comes down by a considerable margin.

The idea behind diversification in funds is simple: not to put all your eggs in one basket! Because in case the basket drops, you'll lose all eggs. Put simply, since funds offer a diverse portfolio, there's a lower risk involved. 

In contrast, stocks are susceptible to market fluctuations, and the performance of one stock in your portfolio cannot balance another, so they remain high on risk.

Other critical differences include:

• Investment cost – For fund investments, you only need to pay a nominal fee to the fund managers. However, for stocks, you're required to pay the brokerage and Demat charges.

• Investment horizon – Funds typically need at least 5-7 years to bring back good returns. In contrast, stocks can get you quick and profitable returns if you sell them at the right time.

So, mutual funds vs stocks: which is better?

The choice will ultimately boil down to your preferred investment style and factors like:

• Diversification
• Risk appetite
• Expenses
• Tax benefits
• Returns

Additional Read: How Mutual Funds are Taxed

If you consider the risk involved, funds are more suitable investment options than stocks if you've just arrived on the investment scene. While low on returns compared to stocks, they're much safer options.

But if you're a seasoned player well into the game, the stock market offers tremendous growth pockets where you can put your money to multiply.

Also, funds don't allow you any control over the investments. If you want to sell some stocks in your portfolio, it's a call only the fund manager can take, not you. On the contrary, if you're investing in stocks independently, you'll have more control over your portfolio.

In any case, investing time to understand the stock market before investing your money is the way to go.

Over to you

While there's no clear answer to the "mutual fund or stock market, which is better?" tussle, it's always prudent to pay due diligence. With Tata Capital's Moneyfy app, you can choose from different fund schemes and set goals to enjoy a smooth investment journey. Learn more here.