What Will Make You Rich: Stocks Or Mutual Funds?

The Indian market has become one of the most lucrative avenues for wealth creation over the past two decades. Sensex has grown by 93.65% while Nifty has gained 87.27% over the same 5-year period. 

The growth has been complemented by a staggering rise in the number of domestic investors. Data suggests that the number of Indians buying stocks increased by 142 lakhs in FY21 alone. 

The popularity of mutual funds isn’t far off as there were approximately 10.26 crore MF portfolios as of June 2021. But the question still remains, what’s better: stocks or mutual funds?

What Gives Better Returns - Stocks Or Mutual Funds?

First things first, a mutual fund’s returns would be the average of all the stocks held by it. The best or the worst stock in a mutual fund won’t be representative of the overall returns. 

This, of course, has benefits. It balances the risk that every stock inherently possesses. But the flip side is that the returns may not be on the same level as an individual stock. 

Individual stocks have the potential to be multi-baggers. They have been known to generate lucrative returns over the long term that might beat the returns generated by most mutual funds.  

This logic may not hold true for every stock. Furthermore, the high returns that a stock can generate comes at a relatively higher risk compared to mutual funds. 

Are Stocks Riskier Than Mutual Funds?

Mutual funds diversify their portfolio by investing in multiple stocks. This helps mutual funds distribute the risk that each stock in its portfolio carries. 

An individual stock, logically, can’t do this. Furthermore, stocks are prone to higher volatility. Negative news or below average financials can directly affect the desirability of the stock. 

Assume there exists stock X that’s also in a mutual fund’s portfolio. Stock X has been trading around ₹2,000 for 3 years. But suddenly, news of poor financials emerges and stock X loses 99% of its value. 

This is, of course, bad for the mutual fund but it’s far, far worse for the stock. The mutual fund can sell stock X and rebalance its portfolio, albeit at a loss. 

But it still has the scope to recover the losses through other stocks in its portfolio or by investing in new stocks.

Moreover, mutual funds are professionally managed by experts known as fund managers. They handle the execution of trades in a mutual fund’s portfolio. 

While a fund manager doesn’t guarantee absolute safety, the efficiency of their approach has been known to be correlated with the level of risk.  

What’s The Cost Of Investing In Stocks And Mutual Funds?

Stocks are known to have a lower minimum investment amount compared to mutual funds. In India, you can buy stocks for less than ₹10. Fun fact, there are stocks in India that cost as much as ₹80,000.

Most AMCs and investment apps require you to invest at least ₹100 in mutual funds. Furthermore, mutual funds carry an expense ratio that’s charged as a percentage of the total investment when you sell a fund. 

Broadly speaking, the cost of exiting a mutual fund can range from 0.30-2.5%. As for stocks, you’ll have to pay brokerage fees for executing trades. The fee varies depending on the broker. 

Does Stock Investing Require More Discipline Than Mutual Funds?

You must remember that both stocks and mutual funds are market-related investments. They’re known to be affected by various factors and are prone to volatility.  

This means that you’ll have to do thorough research before investing in either stocks or mutual funds. Moreover, investing in stocks or mutual funds is part 1 of the investment journey. 

The hard part is to stay invested in the stock or mutual fund through the volatility. Staying invested in any asset requires a certain degree of confidence in the investment, discipline, and patience. 

Getting investment advice from reliable experts like the ones Cube gives you access to is one way to gain confidence in your investments. Busy professionals, especially, can benefit from it. 

Watch this video to know more about Cube’s advisors

Tax Implications Of Investing In Stocks And Mutual Funds

Short term capital gains tax is applicable when mutual funds or stocks are sold after less than a year. Long term capital gains tax is applicable when mutual funds or stocks are sold after 3 years. 

Securities Transaction Tax (STT) is applicable when you buy shares listed on recognized stock exchanges. It’s generally 0.1%. 

So… Should You Invest In Stocks Or Mutual Funds?

Stocks and mutual funds have the potential to outperform traditional assets like bank FDs and RDs. Mutual funds allow investors to gain exposure to multiple stocks in one investment. 

The diversification helps reduce the risk that’s normally associated with stocks. However, the returns generated by a mutual fund generally pale in comparison to that of individual stocks. 

Seasoned investors who know the ins and outs of the market are known to invest in stocks. But picking the best stocks is easier said than done even for the most experienced investors. 

That’s why busy professionals who don’t have the time for in-depth research have been known to invest in mutual funds. In either case, it’s best to consult a reliable financial advisor before investing. 

Watch this video to find out how you can access the best handpicked mutual funds in India