Stocks or Mutual Funds

06 Jun

Investment in equity helps in creation of long-term wealth. We can invest in equity either directly or indirectly. Direct investment means purchasing of stocks directly whereas, indirect investment means, investing in equities through mutual funds. So, how investment in stocks is different from that of investment in mutual funds?

Investing means, procuring an asset with a view to generate profit and earn income. Investing is done for a long-term period whereas trading is done for short period of time. An astute investor looks at the fundamentals of the assets before employing his corpus. Well there are lot of differences between stocks and mutual funds.

Differences between stock and mutual fund

Stocks	Mutual funds
Demat account is compulsory for buying and selling of shares	Demat account not required with an exception to, buying and selling of ETFs
Are tradable through broker except, IPO’s	Tradable through financial broker or directly through fund houses
You become part owner of the company thus, making you eligible for bonus shares, voting rights, etc	You are not part owner of the company hence, not eligible for any rights
Right to get dividend if the company makes profit	Eligible to receive dividend if you choose that option thus, enhancing the value of your investment by the dividend amount declared
Regular check on the performance of your holdings	Expert fund managers look after your investments
Huge amount required for diversification	Diversification possible through an amount, as low as Rs. 5000

Merits and demerits of investing in stock

Merits	Demerits
You become part owner of the company	Increases risk if the company closes down and ultimately you lose your money
You can generate dividend which becomes your source of income	An profit generating company can even face loses thus, you end up losing dividend
Trading can be done at your favourable price using the option of stop loss	It sometimes becomes very difficult to trade even with stop losses
	Apt for knowledgeable investors
	Its time consuming as it requires in-depth fundamental research of the stocks
	Diversification requires huge investment which is not feasible for every investor
	Lack of liquidity, especially if the company is small

Merits and demerits of investing in mutual funds

Merits	Demerits
Managed by professionals	You got to pay charges, for your fund being managed by the experts
Diversification possible through minimum amount of Rs. 5000	Your fund manager decides where your money will be invested. He may sometimes be wrong ultimately causing you loss
Highly liquid	You got to pay exit load if you redeem before specific period of time
One can purchase the same directly thus saving your entry load	High fund management charges can minimize your return
Mutual funds do not close down rather get merged with another fund to become successful	It may sometimes get mishandled by mutual fund advisors or even fund houses

Both stocks and mutual funds have their own pros and cons and are apt if done for longer period of time. Investors having time, knowledge and money can invest directly, others can take the help of fund managers.