Are mutual funds better than stocks?
9 January 2023
"Let’s not complicate this article, like any other information available on the internet with those financial terms....."
.....and complex expressions. Let’s start it simple. Every one of us has a different story with money-making and even with investments. Some of you might have started the stock market, some with accumulating money in your post office account, some with SIP, and so on, but all of you have a common question. Which investments would give me the best return? Mutual funds, stocks, gold, property etc. etc. Again I am very sure most of you either searched on Google or youtube, but several views are present on the internet.
Now starting from saving money in your bank account, no one wants to wait a whole year to get a 4% of return on investment, coming to gold and property investment, it takes a large chunk of money to invest, and looking at the reality not everyone has lakhs of rupees to invest at a time. Later comes other two common investment methods stock market, and mutual funds. Which one to go for?, Which one will give a better ROI?, Which has lower risk?, and several similar questions. The ultimate purpose of this article is to solve them and give you a clear picture.
What are mutual funds?
Mutual funds are a mixture of stocks and bonds that are managed by asset management companies [AMC]. Let me elaborate on the meaning of AMC, these people pool investors money [people who invest in mutual funds] and make that capital work for them and even the investors. Basically, people who are aware about the market condition, who can reasonably predict the coming situation of the economic world, who have appropriate knowledge of business assessment would invest your money and give a return on investment to you, and obviously, they earn in the process too.
Types of mutual funds
1. Debt mutual fund: Here investment is made by the asset management companies in corporate and government bonds, corporate debt security, and even money market instruments.
2. Equity mutual fund: Here investment is made by the asset management companies in the share of several companies. Now under this, there are again various types like an investment just in the nifty 50 stocks, and several different types.
3. Hybrid mutual funds: Here investment is not just made in one asset like equity or debt but in several different assets.
There are several other categories or sub-categories but the most popular once are explained above.
What are stocks?
When one buys shares in a particular company, they are the owner of some percent of the company, this part-ownership represents stocks. Now there are numerous companies listed and you can buy their equity and become a shareholder. Buying stocks is not a complex process, but which shares to buy is a difficult code to crack. One needs to have sound knowledge of several things to invest their hard earn money in the equity markets.
Now let’s dive in a bit more into these topics and find an answer to our question- Are mutual funds better than stocks?
Mutual funds vs. Stocks
● Not everyone has the appropriate amount of knowledge on understanding and assessing a company’s balance sheet and all other financial data, so the majority of investors, make investments on a guesswork basis in the stock market. Whereas, if investments are made in mutual funds, investors need not worry about which bond or stock to invest in, all you have to do is choose a particular category of a mutual fund, and the rest of the job is on the asset management company’s fund manager.
● Risk is comparatively low in mutual funds, when compared to the stock market. The returns you would get in mutual funds might have an effect on the market volatility, but it would never be fully affected.
● Mutual fund investments would not take much time, all you have to do is a select category of a mutual fund, and select if you want to go for SIP or onetime payment.
● Coming to the nifty 50 [These are listed stocks of top 50 Indian companies], now the majority of these stocks have a market price in thousands, for newbies it may sometimes not to possible to even buy one share from the nifty 50. On the other hand, coming to equity mutual funds, there are options in which you can invest in mutual funds where solely investments are made in nifty fifty by the asset management company.
● An Investor can feely rely on the money manager of the AMC, who would allocate your asset, and assist you in getting the best returns on investment.
● Tax benefits are like icing on the cake for investments made in mutual funds, you can get a deduction under VI-A, section 80C, and even in section 80CCG.
● Diversification can save investors from market volatility, and what better way to diversify your investments than investing in mutual funds.
Do mutual funds have zero risk involved?
Zero risk, no. Just like other investments, there are chances of losses in mutual funds too. But, compared to other investment options, mutual funds guards you from major risks. That is the risk here is low when collated with stock markets.
Happy and successful investing.
Now going ahead with mutual funds or with the stock market, is your choice. The choice you make would be based on the knowledge you have, the time available to you, and the efforts you are willing to put. If you are a new-bie or are someone who has a limited amount of knowledge then mutual funds are a go to option for you. On the other, if you have a good amount of knowledge of the stock market and have the required risk appetite then go for it and win the game. Lastly, remember these points before making any investment:
● First research then invest.
● Do not trust random rumors.
● Take advice from experts.
● Do not share with everyone the information about the investments you made.
Invest with a goal.