Investment in the correct financial instrument is the best option to build wealth. Now the question is where to invest? You can go for buying stocks or can opt for mutual fund investments. If you are have a good knowledge of stocks, you can directly buy stocks. But if you are someone who is not so aware of the market conditions, then no doubt you should buy mutual fund. Most of the time mutual fund investments are considered safer investment option than stocks. Before getting in to as why mutual funds are safer than stocks, let’s first have a look at what is mutual fund and stocks.
Mutual Fund pools money from the investors and based on their financial goal invests in different securities like- stocks, money market instruments, bonds and other securities. Professional fund managers manages your mutual fund portfolio and perform market research before investing. To reduce the risk, mutual funds offers diversification in investments. It is best suited for those who do not have market knowledge but wants to create wealth. Mutual fund offers high return with reduced risk and generate wealth for future.
In simple words, buying stocks means buying ownership of a company. A small part of a company’s value is described as stocks or shares. When you buy a stock, that means you share the ownership of that particular company with the other stockholders. You will be able to buy or sell stocks of the company on a stock exchange. The stock value is determined by the demand and supply in the market. With the growth of the company, you as a stockholder will earn profit.
Now lets’ see as why mutual funds are safer than stocks-
- Tracking of stocks– When you invest in mutual fund, your investment decision is taken by the expert fund managers. They study the martket thoroughly and tracks the invested stocks, bonds. So, you do not have the pressure to track the stocks. But when you buy stocks directly, you need to track the stocks and its performance by yourself which is really stressful.
- Investment- One of the great advantages of mutual fund investment is that experienced fund managers manages your stocks and take the investment decision on your behalf. But your decision to invest in stocks purely depends on you. The loss incurred due to any wrong decision will be beared by you only.
- Demat a/c- You do not have to open any demat account for mutual fund investments. But demat account is mandatory for buying and selling stocks in the share market.
- Market knowledge– If you are a novice investor and have zero knowledge about market conditions, then the best investment option is mutual fund. But you cannot do that in case of buying stocks. You need to have sound market knowledge when you invest in stocks.
- Risk– When you invest in mutual fund, the risk involved is reduced by investing in a mix of securities like bonds, stocks, money market instruments etc. But investing in stocks involves high risk as you cannot diversify the risk. You either face a loss or earn a high profit.
- Diversified portfolio- If you want to earn good return with minimized risk, then you can easily invest in diversified mutual fund. But creating such a diversified portfolio with only stocks involves a lot of confusion and is really expensive.
- Tax charged– When you invest in mutual fund, you need not have to pay any tax on the short term capital gains. But you need to pay 15% on the short term capital gain when you invest in stocks directly.
- Tax benefit- ELSS mutual fund investments involves tax benefit under Section 80C. No such tax benefit is possible for investment in stocks.
- Volatility- The returns from mutual funds are less volatile in comparison to the direct stock investments.
- Investment cost– You need to pay an expense ratio annually to manage portfolio under mutual fund investments. But you need to pay brokerage fee for every transaction in stock investments.