Mutual Funds vs Stocks

Stocks represent ownership in individual companies, whereas mutual funds consist of a diversified portfolio of hundreds or even thousands of stocks, bonds, or other assets. Mutual funds generally carry lower risk than direct stock investments due to diversification. While stocks are more volatile, they have the potential to yield higher returns than mutual funds.
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Difference Between Stocks and Mutual Funds
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4 mins read
14-Feburary-2025

While mutual funds offer a degree of risk mitigation through diversification, direct stock investing can potentially yield higher returns but also carries a greater level of risk. The choice between these two investment avenues depends on individual risk tolerance, financial goals, and investment horizon. However, investors need not choose between the two; rather, they can strategically utilize both stocks and mutual funds within their investment portfolio to pursue financial growth and achieve their objectives. In this article, we will explore the differences between stocks and mutual funds, analysing their respective pros, cons, and suitability for various investment goals. By gaining insight into these differences, readers can make informed decisions about how to construct a balanced and effective investment portfolio tailored to their needs.

What are mutual funds?

Mutual funds are a type of investment vehicle that pool money from a group of investors and invest it in a variety of assets, such as stocks, bonds, and money market instruments. This allows investors to diversify their risk and achieve their financial goals easily. Investors own the units allotted to them by the mutual and do not have ownership of underlying assets. Bajaj Finserv Platform is a leading mutual fund investment platform in India that makes it easy to invest in mutual funds.

What are stocks?

Stocks (also known as equity) represent ownership in a corporation/company. When you buy a stock, you acquire a share or partial ownership in that company. These shares entitle you to a proportionate claim on the company’s assets and earnings. There are two main types of stocks: common and preferred. Common stockholders have voting rights and may receive dividends. Preferred stockholders typically receive fixed dividends but have limited voting rights. Historically, stocks have outperformed most other investments over the long run, making them a fundamental part of many investors’ portfolios.

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Mutual funds vs Stocks: A tabular breakdown

S.No.

Parameters

Stocks

Mutual Funds

1.

Definition

They represent the ownership of companies.

Investors are similar to shareholders who own funds or stocks and earn profits from them.

2.

Denomination

Different stocks can have the same or equal value.

Essentially it is a pool of money collected from investors.

3.

Numeric value

Stocks have a definite numerical value.

Mutual funds have net asset values.

4.

Original Issuance

Original issuance is always a possibility.

There is no such possibility.

5.

Risk level

They come with a higher risk level.

The risk factor is comparatively low.

6.

Suitability

Seasoned investors with sound market knowledge have chance of performing better in stocks.

Professionals manage these funds, and both new and seasoned investors can benefit through it.

7.

Diversification

Diversification is only possible if the stocks allow it.

Mutual funds offer more opportunities for diversification.

8.

Return Potential

They offer relatively higher returns.

Depending on the scheme, it provides high to moderate returns.

9.

Market Knowledge

Investors must be well-versed with the market forces to manage stocks effectively.

Market knowledge is rewarding in case of mutual funds as well.

10.

Trading Cost

The trading cost is significantly high.

The expense for funds is retrieved through investors during the investment.

11.

Convenience

Individuals can invest in stocks through Demat and Trading Account. The process to do so is cumbersome and less convenient.

Investing in mutual funds is relatively more convenient and can be initiated within minutes.

12.

Tax Benefits

Investors must pay a tax while selling their stocks.

Several mutual fund schemes offer tax-saving benefits to investors.

13.

Restrictions

It comes with asset-class restrictions.

Investors can put their money in a diversified portfolio.

14.

Investment Horizon

Investment in stocks can either be for the long-term or short-term.

Most mutual funds reflect better results when kept invested for the long-run.

15.

Systematic Plan

Stocks do not extend the feature of systematic investment plans.

Mutual funds come with the feature of the systematic investment plan.

16.

Control Over Investment

Stockholders tend to have relatively more control over their investment.

Mutual funds investors do not have much control over their investments.


Based on the disparity between stocks and mutual funds, it is evident that both types of investments can be rewarding. However, investors should choose between the two based on their capabilities.

Pros and cons of mutual funds

Mutual funds offer diversification and professional management but come with fees and potential for lower returns. Let us explore the advantages and disadvantages of mutual funds in detail:

Pros:

  • Diversification: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities, reducing individual investor risk.
  • Professional management: Mutual funds are managed by experienced fund managers who make investment decisions on behalf of investors, leveraging their expertise and research capabilities.
  • Accessibility: Mutual funds offer accessibility to investors with varying investment amounts, allowing even small investors to participate in diversified investment opportunities.
  • Liquidity: Mutual fund units are bought and sold based on their net asset value (NAV), providing investors with liquidity as they can redeem their units anytime, subject to market conditions.
  • Convenience: Mutual funds offer convenience through features like systematic investment plans (SIPs) and systematic withdrawal plans (SWPs), enabling investors to automate their investment and redemption processes.

Cons:

  • Fees and expenses: Mutual funds charge fees and expenses, including management fees, administrative costs, and sales charges, which can erode overall returns over time.
  • Lack of control: Investors in mutual funds delegate investment decisions to fund managers, relinquishing control over individual investment choices and timing of transactions.
  • Market risk: Mutual funds are subject to market risk, and fluctuations in market conditions can impact the value of the fund's underlying investments, leading to potential losses for investors.
  • Overdiversification: While diversification is a key advantage of mutual funds, overdiversification can dilute returns and limit the potential for significant gains, especially in high-performing sectors or stocks.
  • Tax implications: Mutual fund investments may be subject to capital gains tax, dividend distribution tax, and other taxes, depending on the type of fund and the investor's holding period, potentially reducing overall returns.

Understanding these pros and cons can help investors make informed decisions about whether mutual funds align with their investment goals, risk tolerance, and financial objectives.

Pros and cons of stocks

Pros:

  • Potential for high returns: Stocks offer the potential for high returns over the long term, especially in growing companies or emerging sectors.
  • Ownership stake: Investing in stocks provides shareholders with partial ownership of the company, entitling them to voting rights and a share of company profits through dividends.
  • Liquidity: Stocks are highly liquid assets, allowing investors to buy and sell shares relatively quickly on public stock exchanges.
  • Diversification opportunities: Investors can diversify their portfolios by investing in a variety of stocks across different industries, regions, and market capitalisations.
  • Hedge against inflation: Stocks have historically provided a hedge against inflation, as companies can adjust prices for goods and services to reflect rising costs.

Cons:

  • Volatility: Stocks are subject to price fluctuations and market volatility, which can result in significant short-term losses and fluctuations in portfolio value.
  • Risk of loss: Investing in stocks carries the risk of partial or total loss of invested capital, especially in the case of bankruptcy or poor company performance.
  • Lack of control: Shareholders have limited control over company decisions and management actions, as major decisions are often made by company executives and boards of directors.
  • Emotional investing: Stock market fluctuations and media hype can lead to emotional investing decisions, such as panic selling during market downturns or overconfidence during bull markets.
  • Research and due diligence: Successful stock investing requires thorough research, analysis, and due diligence to identify quality companies, understand market trends, and make informed investment decisions.

Frequently asked questions

Which is safer, mutual fund or shares?

While direct stock investment offers the potential for higher returns, it also entails a correspondingly higher level of risk. Diversified mutual funds can mitigate this risk by spreading investments across multiple securities. The choice between individual stocks and mutual funds is a complex one, influenced by individual risk tolerance and investment goals. Careful consideration of the advantages and drawbacks of each option is essential for making informed investment decisions.

What are the different types of shares?

Common shares, also known as equity shares, and preference shares are the two primary types.

What is the difference between shares and mutual funds?

While individual shares offer investors direct ownership and selection of specific equities, mutual funds provide a diversified portfolio of assets managed by professionals. This pooled investment approach allows investors to benefit from expert decision-making and risk mitigation, aligning with their financial objectives and tolerance for volatility.

Are Mutual Funds affected by the stock market?

Yes, Mutual Funds can be influenced by stock market movements since they invest in stocks, bonds, and other securities. Changes in the stock market can impact the overall value of the mutual fund's portfolio.

Mutual funds or stocks—which one offers more security?

Mutual funds typically offer more security compared to individual stocks because they spread investments across various assets, reducing the impact of market fluctuations. However, the level of security depends on the specific mutual fund or stock chosen.

Mutual funds vs stocks - Which is better?

Mutual funds offer diversification, professional management, and lower costs. Stocks can be riskier but potentially deliver higher returns. For most investors, a diversified portfolio with both mutual funds and stocks is a balanced approach.

Why choose stocks over mutual funds?

Stocks allow direct ownership in companies. Investors can participate in company decisions and benefit from individual stock performance. However, stocks are more volatile and require research and expertise.

Is it wise to invest in stocks?

Yes, but with caution. Stocks offer growth potential, dividends, and long-term returns. Understand the risks, diversify, and invest for the long term.

Should I invest in 100% stocks?

Consider your risk tolerance and time horizon. While 100% stocks may offer high returns, it is risky during market downturns. Diversification with a mix of assets is often a better strategy.

Is a stock called a share?

A stock represents the overall ownership in a company, while a share refers to a specific unit of that ownership. While used interchangeably, they differ in context. For example, owning "stock" implies partial ownership of a company, while "shares" specify the number of units owned. Together, they reflect an investor’s stake in a company’s equity.

How many stocks is 1 share?

A share is the smallest unit of a company’s stock, representing a single portion of ownership. If you own one share, you own one unit of that company’s stock. Stocks collectively refer to all shares issued by the company, while individual shares quantify ownership in terms of units.

Is mutual fund good or bad?

Mutual funds are generally considered good for investors seeking diversification and professional management. They reduce risk by spreading investments across various securities. However, they might not suit everyone, especially if you prefer direct control over investments. Assess your financial goals, risk tolerance, and costs involved to determine if mutual funds align with your needs.

What are the best-performing stocks in 2024, and how can I identify them?

Identifying top-performing stocks in 2024 requires research into market trends, sector performance, and company fundamentals like revenue growth and innovation. Look for companies showing strong financial health, low debt levels, and competitive advantages. Use tools like stock screeners and analyst recommendations to compare performance and invest based on your risk appetite and goals.

How do I start investing in stocks as a beginner in 2024?

Begin investing in stocks by opening a Demat and trading account with a trusted broker. Research companies, understand their fundamentals, and invest small amounts initially. Use online tools and resources to learn about stock markets. Diversify your investments across sectors and avoid emotional decisions to minimise risks and maximise returns.

What factors should I consider before buying a stock?

Key factors include the company’s financial performance, market position, industry trends, and management quality. Analyse its price-to-earnings ratio, dividend yield, and growth potential. Also, assess the stock’s volatility, historical performance, and alignment with your risk tolerance and financial goals. Diversification and understanding market conditions can further guide smart investment decisions.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

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Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.