What is a stock investment?
Stock investment is the direct investment in the stocks of the company. You purchase the stocks of the company listed in the stock exchange with an expectation to earn good returns whenever the value of that stock goes up. It is the term that represents the ownership certificates of a company. There are two types of stock- preferred and common. Every shareholder has to face both the profit and loss of the fund invested. The performance is tracked as per the change in the total market capitalization. It is calculated based on the total performance of the principal invested.
What is mutual fund investment?
Mutual funds are gradually becoming an intellectual source of income for future entrepreneurs as it is profitable and safer than stocks or shares. A collection of many funds from several investors who invest in various securities such as bonds, shares, or assets is a mutual fund. This type of investment is operated by the manager who makes capital gains and income for the investors.
Difference between stocks and mutual fund
The range of fluctuations, in the case of stocks, is extreme. There are days when you could make a return of 25% and also 15%. The stock value is subject to change and is not constant. Investors try to make the most profit.
While mutual funds are way more stable than stocks. It is quite diverse and there are many options for market capitalization and sectors to make investments. The diversification makes the value less volatile.
- Potential Returns
You could opt for investing in stocks if looking for a short-term capital gain. But before you make any investments, brief research of the sector is required. Without proper research, there could be a loss if invested in a risky market.
Whereas mutual funds are profitable and promise good returns. There is less possibility of earning a high amount in mutual funds as compared to your earnings in the stock market. You should not invest in mutual funds if you are looking for short-term returns.
You have to keep your eye on the stock market investment. A regular check on the stocks at least every quarter is recommended to every investor. You need to stay updated about the news and developments happening in the market.
On the other hand, mutual funds do not need to be monitored individually. A manager operates the fund and tries to make the best profits for the investors. He is supposed to balance the portfolio by adding and removing stocks.
- Restriction of Assets
There are limited investment options in stocks such as large-cap stock, mid-cap stock, and small-cap stock.
Whereas in mutual funds, there are various areas to invest in such as debt funds, equity funds, gold funds, etc.
- Systematic Investment Plan
SIP’s do not apply to the stock market. As there is no diversification, the concept of SIP is not practical. The risk factor lies in one stock and can go under a period of fall for years.
A systematic Investment Plan is a monthly investment in mutual funds. Investors who are not able to invest a big amount in one go can opt for mutual funds. One should have an idea about the returns he would get after investing in mutual funds.
- Tax saving
There are no tax benefits in the stock market. You will have to pay a tax of 15% on short-term capital gains and a tax of 10% on long-term capital gains.
While in the case of mutual funds, as long as you hold the fund you do not need to pay tax if the fund sells any stock. In mutual funds, you get a tax deduction up to Rs. 1.5 lakhs in a year under Section 80C.
- Investment ease
You will need to open a brokerage account with the help of a broker before investing in the stock market. You will also need your Demat and trading account to proceed with your investment plans.
If you want to invest in mutual funds, then you begin within 10 minutes. You will not require any brokerage account to start with your investment.
- Return potential
Stocks have very high return potential.
While mutual funds have consistent returns but it is quite less than the stock returns.
- The time required for investment
Investing in stocks requires a lot more time when compared to investing in mutual funds. This is because there is a manager who monitors the mutual funds while investing in stocks. You need to do your research and understand the returns before investment.
- Cost of investment
If you want to invest in the stock market, then you have to open a brokerage account and pay some annual maintenance charges like STT, Stamp duty, etc.
There are many different charges that you have to pay while investing in mutual funds like an expense ratio, load fee, etc.
- The horizon of investment
If you invest in stocks, it can either be short-term or long-term.
On the contrary, the horizon of investment in mutual funds for the long-term is 5-7years. You cannot invest in mutual funds for the short-term.
Common Terminologies used for Stocks and Mutual Funds
P/E Ratio - PE Ratio means Price-earnings ratio that is the ratio of the share price of a company to the earnings per share of the company. It is used to determine whether the company is undervalued or overvalued. It is essential to compare the risk factor and benefits of stocks and mutual funds before deciding what to invest in.
Capital gain is the asset’s value that can be either short-term or long-term. These terms hold great importance when thinking of investing in something. This is applicable to both shares and mutual funds
There are various factors to keep in mind before making a big investment move such as tracking your investment, knowing all the risk and return factor, tax gains, diversification, monitoring investment, time, and research. You should also remember that no investment is risk-free. Still, investing in mutual funds is comparatively less risky than the stock market. If you are a new investor, you should do complete research and understand your passion before starting any investment. There are several factors that you need to keep in mind before choosing the right investment sector for yourself.