How to choose Mutual Funds or Stocks for your investments

By pooling a lot of stocks or bonds, mutual funds reduce the risk of investing.

Representational Image: Photo: Pixabay

Both stocks and mutual funds market are booming in India, but as an investor, we are often confused to choose between the two for our investment plans.

Investment in equity, bonds or funds comes with higher risk and higher reward, therefore, it is always better to first study about the scheme we plan to invest.

Mutual funds:

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Mutual fund scheme is a pool of savings contributed by multiple investors. The term ‘mutual’ fund means that all risks, rewards, gains or losses pertaining to, or arising from the investments made out of this savings pool are shared by all investors in proportion to their contributions.

There are wide-range of mutual funds in India like - equity, debt, money market, hybrid or balanced, sector-related, index funds, tax-savings fund and lastly fund of funds.

Stock Market

Stock market are usually interesting source of income for both companies and share holders. Under the stock market, anyone can buy stakes of a company in whom they have faith.

Companies which have received better ratings by agencies are generally preferred the most. No matter what may be the circumstances, an investor holds on to the company's stake for their regular source of income.

Which one is better for investment?

According to Motilal Oswal, if you are typically in your 20s to 30s belt, you can start building your investment portfolio with the help of mutual funds. You need to start off with a very minimum capital and you can find that your investment keeps growing at a gradual space.

The agency believes that for first-time investors, the mutual funds offer a tremendous scope for growth as your funds are invested in diversified forms of revenue generating sources.

On the other hand, Motilal believes that if an investor belongs to late 40s up until 70s of their age and are also seasoned investors, then investing in stocks is a good idea.

It further said that decades of exposure to the financial market helps you gauge the right type of equities, shares or stocks, you need to invest your money in.

Among many advantages of investing in mutual funds is that you can appoint fund managers to select funds, track performance, make appropriate asset allocations and cash-in your profits for you.

These managers try to ensure that an investor’s portfolio consists of well-performing funds, rather than those that might drag down the overall investment returns.

In case, you are stock market investor, and sell your holding within a period of one year, then you have to pay 15% as short-term capital gains tax.

As for mutual funds, there are no gains tax levied on the stocks that are sold by the fund. But one needs to remember that an investor must hold equity funds for a minimum of one year (the longer, the better, really) if they want to avoid paying capital gains tax on the investments.

If you venture into stock investments on your own, brokerage costs of 0.5-1% will be a common expense. Apart from this, you will also have to pay for demat charges.

BankBazaar stated that mutual funds pay only a fraction of the brokerage costs compared to what is charged to individual investors. Investors in Mutual Funds do not need demat accounts.

A well-diversified investment portfolio ideally has around 25-30 stocks, and this kind of portfolio is only achievable with a sizable corpus.

With investment in mutual funds, an investors can buy a certain number of funds which can be invested in various stocks.

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