What is the Difference Between Mutual Funds and Stocks?
Making the right investment can help you create wealth, thereby securing your future in the long run. However, when it comes to investing in equity, a lot of investors are confused regarding whether they should invest in stocks or mutual funds. Before learning about the differences, it’s essential to understand what are stocks and mutual funds:
Stock market investing and mutual fund investing
Stock market investing essentially means investing directly in the stocks of the company listed on the stock exchange. If the price of the stocks purchased increases, you will earn profits. Whereas, if the stock prices go down, your investment will also take a hit.
Mutual funds are professionally managed investments wherein money is pooled from investors with an objective to invest in securities like stocks, bonds, or other assets. Since investing in mutual funds offers a wide range of investment choices, it allows you to analyse your risk appetite, financial goals, etc., and invest accordingly. In mutual funds, the stock-picking is done by professional fund managers. You must keep track of the performance of the fund and not individual stocks within the fund.
We have enlisted the key differences between mutual funds and stocks based on some essential parameters below. Being aware of these differences will help you invest your hard-earned money in the right way as per your risk-appetite and financial capacity.
Difference between stocks and mutual funds
- Investment volatility
Directly investing in stocks is more volatile as compared to mutual fund investing. The performance of the stocks purchased depends entirely on the company’s performance. On the other hand, a mutual fund allows you to invest in different securities, which in turn, diversifies your investment portfolio. As a result of this broad diversification, the volatility in mutual funds is lesser as compared to stocks. Therefore, if you have a low-risk appetite, it’s advisable to invest in mutual funds online rather than investing in stocks.
- Monitoring of investment
Stock market investing requires high monitoring due to its high volatility. Moreover, you will have to monitor your stocks yourself. On the contrary, in case of mutual funds, there are fund managers who monitor your investments and help you make the buy/sell decision for maximum returns.
- Time horizon of investment
Mutual funds are also known as goal-based investments. You can stay invested in mutual funds for years depending upon your financial goals. The returns obtained through capital appreciation can be utilized for purchasing a property, funding children’s education, or even planning retirement. On the other hand, you can invest in stocks either for a long-term or short term. You can even keep the stock for a week and fetch good returns.
You must note that no investment is completely risk-free. However, investing in mutual fund is comparatively less risky than the stock market. Thus, if you are a novice, you should start your investment journey with mutual funds for beginners. Once you gain experience and acquire good knowledge of the stock market, you can consider investing in stocks for higher returns.