Should I invest in stocks or mutual funds?

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Investment in stock are done on share of the company directly by you, so you become the shareholder or owner of that company by the proportion of the share you invested in. Stock investors can participate in online or offline voting and attend Annual General Meetings of the company.

However, in mutual funds, all the retail investors’ money is collected or pooled by authorized Mutual Fund Manager. These fund managers invest your money mostly on stock market on your behalf for certain charges. One is able to check the portfolio as where your money is being invested by such Fund Manager and in what proportion.

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Before deciding on whether you want to invest in Stock or Mutual funds, there are 5 factors that you need to consider:

1. Purpose or Motive: First find out what is your motive of investment, is it purely investment or want to save tax. For example in India one can invest in ELSS mutual fund and some equity based mutual fund to get tax benefit under Section 80C of ITA. If your motive is purely investment and want to gain maximum then stock could be option, but if it is tax benefit then mutual fund.

2. Risk and Reward: In stocks all the profit or loss is on you, but in mutual funds, it is leverage with other mutual fund investors. If you have an appetite for risk and reward, you can try to invest on stocks. However, if you do not want to take much risk, then you could invest on mutual funds. Please note that even in Mutual Fund there is always risks if the fund is market-based. There are some mutual fund which is not market-based and provide dividends.

3. Your Knowledge on Stock Markets: If you have some knowledge in Stock Market, you have option either to invest in stock or in mutual fund. However if you feel that you do not understand how stock market works, then you can invest in mutual fund.

4. Rely on Others to manage your funds: If you think that you cannot trade during trading hours or do not posses enough knowledge, then one can rely on Fund Managers to invest on Stock market. However if you have trading account and think that you can take the risk and buy your own, you can invest in Stock Market. One can buy or invest in mutual fund anytime of the day even on holidays, however one can buy and sell shares only during trading hours.

5. Locking Period: In Stock there is no lock in period. In mutual fund there are certain terms and conditions laid out such as entry fee and exit charges, holding period. Please read the terms and conditions before you invest in mutual fund too. For example if the minimum holding period for mutual fund is 1 year and if one exits, there would be penalty of exit charges levied.

Also, in Stock market one need to buy round number or whole number of stock units. For example one can either buy 1 or 2 units of share but cannot not buy 1.5 share.

However in Mutual fund there are minimum or multiples of amount that we need to put in or in some case we can put any amount. Out of the money we put in mutual fund is converted into the proportion of units that mutual fund is currently being traded. For example if the current market price of mutual fund A is price at Rs32.45 and you have invested Rs10000, then the mutual fund allocated to you would be Rs10,000/Rs32.45=308.167(approx) Units.

Please note that tax benefit can be availed in ELSS mutual funds in India and not sure if there is such benefit elsewhere in the world. Considering the above points, one can decide on whether you want to invest in Stock or in Mutual funds. Do not forget to do more research on Stock Market and on Mutual Funds, before you put your money into an investment.
Thanks for Reading!