When a person thinks about entering the Stock market the first question that comes to their mind is whether they should only invest in mutual funds or they should also invest in individual stocks.
There are many factors that a person should look after before making this decision and we will be discussing all those important factors in this article.
Before discussing those factors let’s see what is the general difference between a stock and a mutual fund.
When you buy a share of a company you become a partial owner of that company and you make a profit when the share price increases. But mutual fund is a portfolio of stocks, debentures, bonds etc depending upon the type of mutual fund you are investing in and when you buy a unit of a mutual fund your money indirectly gets invested in all the companies or other instruments that the mutual fund is holding and you make a profit when the whole portfolio performs well.
1. Return potential
When talking about returns no asset class has given more returns than equity. There’s no limit of returns that a person can make from their own portfolio of shares but investing in individual shares can be very risky if not done it properly which we are going to talk about in the next point.
Whereas investing in a good mutual fund can generate you an annual return of 14 to 15 % on average and it is very unlikely to lose money in a mutual fund if invested for a longer time frame.
2. Risk involved
If you want to invest in individual shares the first thing you must do is to learn how it is done properly because only 10% of the people who invest in the stock market actually makes money. Investing in individual stocks can give you much high returns compared to a mutual fund but there are very high risks involved to it. To do that you must have very good knowledge on how to analyse a company fundamentally which take years of experience to learn. If you want to save yourself from all this hard work and headache you should stick to mutual funds which can also earn you decent returns.
3. Diversification
When investing in individual stocks you should not have more than 10 stocks in your portfolio because it is very difficult for an individual to regularly monitor all the companies and you also should not have less than 5 stocks in your portfolio because it's very risky. So when investing in individual stocks your portfolio will be focussed and so will be your returns whereas on an average a mutual fund holds somewhere around 50 to 100 different shares. This diversification makes it safer but also reduces your returns but if invested in a right mutual fund you can easily earn decent returns.
4. Money needed to start Investing
Different companies have shares of different prices ranging from a few rupees to some thousand rupees but keep that in mind that a share of Rs20 can be way more expensive than a share of Rs500 depending on the fundamentals of the company.
Whereas most mutual funds in India demands a minimum lump sum investments of Rs1000 but you can also opt for SIP (Systematic Investment Plan) of as low as Rs100. You don't have this kind of privilege while investing in individual stocks.
5. Cost involved in investing
When you buy shares of a company you need to pay some additional charges on the price of the share like STT, transaction charges, SEBI charges etc.
But when you invest in a mutual fund you only have to pay an expense ratio which can be as minimum as 0.1% and as high as 2 to 3%, depending upon the type of mutual fund you are investing in. The charges in a mutual fund are higher than that in individual shares which is justified because mutual funds are monitored by fund managers and they need a salary for making you those profits.
6. Ease of investment
Investing in mutual funds is way easier than investing in individual shares because in mutual fund all the research and fundamental analysis are done by the fund managers and you just have to check few things like past performance, expense ratio etc before investing in a mutual fund whereas if you want to invest in individual shares you will have to do all the research and fundamental analysis on your own which is not everyone’s cup of tea.
7. Tax savings
If you want to save tax of up to Rs 1.5 lakhs in a year you can invest in an ELSS scheme (according to section 80C of the income tax act) otherwise in both shares and mutual funds a long term capital gain of up to Rs100000 is tax-free.
8. Monitoring your investment
Investing in individual shares require regular monitoring of the companies you have invested in whereas in a mutual fund you just have to check your investments twice a year to see how the mutual funds are performing.
9. Time horizon of Investment
When investing in mutual funds you need to give it at least 5 to 7 years to earn you good returns whereas there is no such time horizon while investing in individual stocks, you can earn good returns in as low as few months to as high as 10 to 12 years.
10. Time required for investing
Investing in shares by yourself takes a lot of time because you will have to do economy, industry and company analysis for each company all by yourself but in a mutual fund all this work is done by the fund manager and you just have to check the past performances of the funds and some other factors which takes no time at all.
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