The vast majority of individuals want to know about the investing choices accessible to them, therefore they are eager to learn more to reduce their tax burden. Individual investors, who are making their first investment purchase seek an answer that is simple and clear: mutual funds or stocks?
It is one of the biggest dilemma for all the new investors, whether to go for MF or direct equity. Why Mutual Funds Are Better Than Stocks is one of the most searched question in different search engines.
The next most search question about mutual funds are what are the advantages and disadvantages of mutual funds. With the availability of so many mobile apps, you can even buy mutual funds without looking for a broker.
By investing in equities and mutual funds, you may be able to achieve high returns, which keep pace with inflation. When considering the level of risk you are prepared to accept, you should take the time to carefully examine the investment.
There is no doubt that interest in stocks has increased with the stock markets moving back to all-time highs. An investor who does not have the necessary knowledge or who does not have the time and effort to invest should not buy stocks directly. So, let’s hear out why mutual funds are better than stocks.
Table of Contents
Smart Investing for Beginners – How To Start !
New investors are encouraged to start with mutual funds, which will allow them to familiarise themselves with the market. Additionally, Mutual Funds are actively managed by dedicated fund managers.
Using their years of experience and in-depth knowledge of financial data, the fund manager will make decisions applying multiple market factors.
In-case of Mutual Funds since the fund manager is putting all the hard work and effort to do the research, individual investors can sit back and relax.
Individual investors who invest in stocks/equity directly does not have the luxury to sit back and relax. They constantly need to track and monitor their investments during the market hours. If someone has a full-time it becomes very gruelling to track all the market events through out the day,
Although if you are a beginner in the field of investment, you will have to do some research initially and take care of below points.
- Plan for a goal first – Why you want to start investment.
- Asses your risk taking ability.
- Look for mutual fund AMC’s which were started at-lest 5 years back.
- Find out the track record and yearly return % of each MF house (In 3-5-10 year format)
- Research the track record of Fund Manager for a particular MF.
Why Mutual Funds Are Better Than Stocks?
Mutual funds are less riskier than stocks when we evaluate on risk parameter. With mutual funds, you are diversified over a wide range of securities. Because a particular mutual fund invests more than 100 different type of stocks.
Thus the portfolio is diversified. Also every stock is not going to crash on a single day, so you are not going to loose all your money.
Investing in stocks requires an investors to do extensive research, especially for those who are just starting or very much new in the field of investment. In mutual funds, the research is done by experts, whom we call as fund managers in their own right.
Fund managers have been given the responsibility of managing the pool of investment. However, a domain expert offers this service for an annual fee. Let’s learn in various aspects why mutual funds are better than stocks:
Investing experts say the best way to minimize risk is through diversification. The majority of the population has learned this lesson following the financial crisis.
One takeaway here is that you should not rely on one source of income. Instead, diversify your investments in various industries and investment vehicles.
Many experts agree that when a portfolio contains around 20/50/100 stocks from diverse industries, it will get all of the advantages of stock diversity. With it, the majority of the risk is no longer in investment portfolios.
Systemic risk and market-wide risk are the remaining risks. Starting as an investor may be challenging since most brokerage companies charge the same fee for one share.
Investing in mutual funds is when things start to get interesting. Diversifying an investment portfolio quickly is an excellent feature of mutual funds.
- A professionally managed enterprise
A team of professionally managed fund managers thoroughly research companies, industries, and the economy before recommending investments. They regularly go through the quarterly earning report, balance sheet, PAT etc before deciding to invest on a particular company.
They meet with the management of the businesses, gaining a comprehensive understanding of the equities to be included in the portfolio. Roughly three-quarters of fund firms also employ a well-developed risk management procedure, which places severe binding limitations on the fund management team.
Alternatively, in the stock market, investors may likely spend significant time studying a company and various sectors to better grasp the business’s inherent headwinds and tailwinds.
Individual investors dealing directly in stocks should also have a clear understanding of the current macroeconomic situation so that they can make sound decisions about which sectors and companies are poised for success in the future.
- The high number of options
You have several different Mutual Fund choices to help you meet your financial objectives.
While several funds focus on various asset classes, including equities funds, debt funds, gold funds, and foreign funds, these are just some of the many kinds of funds that investors may choose from.
Retirement and children’s savings are also supported through funding. An additional option to choose from is passive and active funds. Options may be selected based on the likelihood of their succeeding and the period over which they are effective.
- The risk factor
To achieve diversity, mutual funds do so in two ways. Mutual funds may include a combination of equities and bonds. Investing in corporate bonds has a lower risk than stock investing, which means including corporate bonds into your portfolio may assist decrease risk.
Mutual funds own 100% of their portfolios, but it doesn’t mean all of the securities in the portfolio are issued by the same firm. Unlike an investor who just owns a company’s shares, a mutual fund investor won’t be as badly affected if a single company’s stock plummets.
Due to diversification, mutual funds are less hazardous than individual equities. One of the main techniques for reducing risk is diversifying one’s holdings. The more your risk exposure, the lower your expected return will be.
One of the most important advantages of mutual funds is their ease of access for retail investors, as opposed to doing things such as purchasing individual stock shares.
A mutual fund meeting the investor’s fundamental investment requirements is often considered to be a simpler investment than learning what the businesses the fund invests in really do. They would rather have someone else handle the research and decision-making.
It is all extremely time-consuming determining a portfolio’s asset allocation, as well as studying various stocks to discover those that are positioned well for growth, as well as monitoring the markets.
Many still end up losing money in the stock market, but they do it throughout their whole lives. Mutual funds may not be a guarantee that your assets will grow in value over time, but they provide an alternative to dealing with some of the complex investing decisions that come with stock ownership.
For individual investors, the expenses of frequent stock transactions may pile up fast. The gains from the price growth of the stock may be negated by the expenses of a single sale of the stock held by an investor.
With a mutual fund, however, the total amount that has to be traded is divided up among all participants, thus lowering trading costs per investor.
In the world of full-service brokerage companies, which employ brokers to trade their customers’ shares regularly, making money off of the trading expenses is a standard business practice.
For the majority of investors, the financial benefits of using a broker simply don’t outweigh the associated expenses.
Which Are A Better Investment Stocks or Mutual Funds ?
Mutual funds reduce risk by investing in a wide range of companies.
Stocks, on the other hand, are very susceptible to market circumstances and the performance of one stock cannot make up for the market conditions and performance of another stock.
As a result, the stock risk factor is extremely high.
In terms of investment cost, stocks and mutual funds differ significantly.
In contrast to buying equities, investors must pay fees to mutual fund managers. Actively managing a fund does not come without a price tag.
Investing in equities also incurs costs for a Demat account which is unnecessary when investing in mutual funds.
Also Read: How Interest Rates Affect Mutual Funds
Final Words !
As a beginner or new investor, investing in mutual funds is the smart option. If you really want to reduce your risk, save same precious time on doing stock research, then mutual funds are for you.
On the hind side you will have to pay some additional fees and expenses for that convenience. Mutual funds enable you to choose a broad range of investment choices, therefore enabling you to realize your objectives more consistently within the time frames you have allotted.
However, if you are a risk taker, diving deep into market research, and avoiding costs, then trading on stocks may be the best choice for you. There’s a trade-off between risk and profit, and you must determine what level of risk you can take. We hope you must have got some value from the article, “Why mutual funds are better than stocks.”