13 Differences Between Stock Market and Mutual Funds

stock market and mutual funds

Are you looking to invest your money to get monetary returns? If yes, then stock market and mutual funds are great options. But, which one of these should you choose? Investment in the stock market means that you directly invest in the stocks of a company. You buy the stocks of a company listed on the stock exchange. The price of the share is as per that listed on the exchange. So, you own a share in the said corporation

If the share is available to the general public, you can purchase stocks if you want to contribute to the company’s capital. In the stock market, your aim is to earn profits. This happens when the price of the stock increases. In Mutual Funds, a large number of investors pool their funds together to buy a number of securities such as bonds, stocks, fixed deposits, etc.

In the below post, we will discuss the frequently asked questions about mutual funds and stock markets. These will assist to better understand the differences between both these forms of investments.

Frequently Asked Questions about Investing in Stock Market and Mutual Funds

Here are the FAQs for stock market and mutual fund investments:

  1. What determines the value of Mutual Funds and Stocks?

In the stock market, you invest in shares of a company. The investors have complete ownership of the shares. In mutual funds, you invest in shares of the fund. The investors have fractional ownership to the basket of all securities.

Here is more information:

  • Value Determination of Stocks: A stock market investment is all about purchasing and selling stocks of a company. A stock refers to ownership certificates of a firm. So, as an investor, you can claim a certain portion of the company’s assets and profits. The value of stock that an investor holds is determined by the individual share price of the stock multiplied by the number of shares. The returns from stocks are regular in form of earned dividends. This can differ depending on the decisions by management and the company’s performance.
  • Value Determination of Mutual Funds: In mutual funds, you earn regular dividends. The aim is to offer the dividends at a higher value than that in the market. It is easier to take decisions on investments here as the funds offer a timely statement on the overall fund performance. The price of the security is as per the net set value (NAV). The NAV is the total value of assets and net of expenses. As one of the investors, you have a small stake in the pooled investment for the fund. You get to participate in losses and gains of the fund’s portfolio.
  1. How Easy is it to Invest?

To invest in the share market, you need your own brokerage account. You can get one through assistance of a stockbroker. You need to open a Demat account or trading account. The account opening can take up to a week. However, to invest in mutual funds, you do not need to open a brokerage account. Thus, you can actually invest in mutual funds within a few minutes. A number of online platforms are available that you can register on and begin investing in mutual funds within a few clicks.

  1. How Volatile Are the Investments?

Mutual Funds are less volatile when compared to direct investment in stocks. This is because a mutual fund has a diversified portfolio. Here, you can invest in different securities such as bonds, stocks, fixed deposits, and more. But when investing in shares, you have to buy around 10 to 15 stocks. However, the risk is spread in mutual funds. For instance, in equity-based mutual funds, the minimum investment is usually for 50 to 100 stocks. With diversification of mutual funds, the volatility decreases against that for the stock market.

  1. How Good Are the Returns?

You can expect quite high returns from investing in the stock market. In fact, several successful investors in the world have major investments in shares. However, with great returns, the risks of investments are also higher. This is because a stock performance is volatile. Thus, people may also easily lose money in stock market investment.

The returns potential is not that high for mutual funds, when compared to the stock market. But good ranked mutual funds usually provide consistent and average returns to shareholders. Also, the risk of investment is lower due to lower volatility. Thus, for a common man and investor, building a decent wealth proportion is possible through mutual funds.

  1. How Much Does It Cost to Invest?

You have to pay several charges when investing in mutual funds. These charges are the load fee (entry load, exit loads), expense ratio (can peak up to 3%), etc. For investing in the stock market, you need a brokerage account. For this, you may have to pay account opening charges, annual maintenance fees, brokerage fees, stamp duty, etc. You must check for all the applicable fees and charges for both these types of investments before going ahead with any.

Comparatively, the cost of investing in stocks is a lot lower than that for mutual fund investing. The reason for it is that mutual fund management involves a bounty of charges. These are related to administration, operations, salary to fund manager, etc. However, stock market investment related charges are either fewer or lower. Also, it sees the heaviest cost in brokerage only.

  1. What information is available for trading and commission?

In the stock market, the trading happens throughout the day at the stocks’ prevailing price. In mutual funds, the trading happens usually only once. This is often at the end of the day. As for commission, in case of the stock market, you need to pay it to the broker. This happens when the stock is traded successfully. In case of a mutual fund, the commission is either in the form of load or no load. You can pay it during entry or exit, or at both these periods.

  1. How Much Time it Takes to Decide on Investment?

It takes longer to invest in stock. But it takes less time to invest in mutual funds. To invest in the right stock, you need to do a lot of research. To find the best possible choice for stock market investment will require a lot of effort, study, and time. In case of a mutual fund, the expertise of the fund manager comes to rescue. The professional manages mutual funds. Thus, the time spent for research and study significantly reduces. This makes it easier and quicker for the manager to take the right decision.

  1. How Long is the Investment Time Period?

Investing in stock is either for a short term or long term. You can expect to get good returns even after a week of investment. In stock, you trade funds, but in mutual funds, you do not do so. On the contrary, the duration of mutual funds is for a long-term. Usually, the term is up to 5 years to 7 years. Thus, the intention is to make money in the long-run through capital appreciation. Through dividend funds, you can also earn an income regularly.

  1. Is the Option for SIP Available?

Systematic Investment Plan (SIP) is available for mutual funds. But it is not open for stock market investment. An SIP is basically a periodic investment automation. For instance, you may invest Rs. 3,000 (fixed) per half-yearly/quarterly/monthly to buy a fund unit. It helps you to manage and keep a track of your investments, properly.

  1. What is the Applicable Asset Class?

When it comes to the stock market, it is only the stocks of the company that you can spend on. This is the only asset class allowed for shares. But mutual funds help to diversify your portfolio. You can invest in different asset classes such as equity-based mutual funds, hybrid funds, debt mutual funds, gold funds, etc.

  1. Who Holds the Reins?

You have great control over investments in the stock market. It is you, who can individually decide when and what to buy, sell, etc. But, the degree of control is lower in case of mutual fund investment. Here, the fund manager, but not you, takes the decision such as the types of securities to buy and sell, when to purchase and sell, etc.

The maximum you can do is, find and invest in a particular mutual fund. But the fund manager is the one who takes care of everything else after you invest the money. Remember, the performance of a mutual fund heavily depends on the fund manager’s efficiency. You can expect higher returns, if the fund manager is efficient in taking decisions. Otherwise, a low competence professional may make mistakes and get you fewer returns.

Sometimes, an existing fund manager may quit the role. Then you have to hire someone else for the task. Thus, mutual fund investment is completely dependent on the fund manager’s dealings. But the stock market investment is not dependent on anyone. Here, you are the one to take the sole decision to purchase and sell whichever stock you need.

  1. How Often You Have to Monitor the Investment?

The fund manager takes care of mutual funds’ performance. He/she takes decisions on your behalf to buy and sell. So, it is not you who has to monitor the investment that frequently. But it is wise to at least watch the fund-performance once every year. This way, you can update yourself about the investment’s feasibility, and returns. The practice will also keep you in touch with your investment objectives.

As you have to personally invest in the stock market, it needs frequent monitoring. There is no fund manager to perform an analysis as to which stock is performing better, and to check on its progress. Also, the share market is highly volatile. Thus, you have to check on the status of the stock more often. It is advisable to keep a track of the shares, half-yearly or every quarter.

  1. How Much Tax Can You Save?

You get a tax exemption up to Rs. 1.5 lakhs in a financial year. This is the case if you invest in Equity Linked Saving Scheme (ELSS). The requisites for tax deduction are as per the Section 80C of the Income Tax Act of India. Also, you do not have to pay any tax as long as you hold the fund. This is true, even if the fund sells any of its stock from the portfolio.

But for investing directly in shares/stock market, you have to pay a tax. This is irrespective of the scenario at hand. Also, there are no tax benefits for such investments. Moreover, the tax is 10% and 15% on long-term capital gains and short-term capital gains, respectively. The tax is applicable on a profit of over Rs. 1 lakh for long-term capital gains.

Final Thoughts

It is important for you to firstly know the types of investment that interests you. Simultaneously, chalk out your investment goals. Also, understand your risk appetite to select the best investment tools/products. Know the time you can give to manage your investment portfolio. If you personally have good knowledge about different investment arenas, then you are better prepared to take a call. But if not, you can always rope in a professional for help.

Investing in the stock market or mutual funds, both have their own benefits and risks. However, the risk is a lot lesser for mutual fund investment than in the stock market. But, at the same time, the returns are also lower from mutual funds against that from the shares. Thus, a newbie who has not enough knowledge, limited time and money, may start with mutual funds. Then after gaining sufficient expertise, may move on to the stock market.

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