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Mutual Funds or Stocks ?

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When we look to invest in Equity, what comes to our mind – Individual Stock or Equity Mutual Fund ? While a equity stock or a mutual fund both comes under the category of Equity and they are very good choice for a long term investment and need periodic review. There are several major differences between stock investing and mutual fund investing which should be considered by a common man before initiating investing. It’s a good idea to know where they differ and in which situation they differ, so that one can take better investing decisions. Here are the main differences :

 Monitoring Necessary

Stock investing is a personal affair and you are doing it on your own the decision of what to sell and what to buy is on you. Even in case of long-term investing, you might have to keep an eye every quarter or yearly unless you have really spent some good time in picking the good stock. You need to also keep an eye on news and sector specific developments.

Monitoring in mutual funds is relatively low because the job of monitoring is anyways done by the fund manager who is paid SALARY to filter through the fluctuations. He constantly adds and removes the stocks from the portfolio. This can be a positive point, but sometimes it can be a negative point also if there is too much of churning.


Potential Return

This is very much in line with the above point
but still let’s look at it separately. There are lot of success stories
where someone got quick rich by investing in equities directly and it
can happen, but those are rare happenings and require lot of work and
analysis, patience and belief in what you have picked. If you want
superb returns in short time and you believe you can research well, you
can go for stock investing directly but then risk is also more.

Mutual
funds are known to deliver good returns (not in line with stocks, but
still very good). So you can expect handsome returns from mutual funds
but not unbelievable like stocks return. This is mainly because the
money is diversified across different stocks (read ideas) and chances of
all of them becoming a super success in short time is impossible.


Volatility

When we invest in single stock or bunch of
stocks (3-5 scrips), the change in portfolio is very high. On a given
day it can be extremely volatile. It can give you 20% return and
sometimes -10% loss also depending on the market colour. This can be very
exciting and at the same time very disheartening and gives you a feeling
that you need to “act fast”.

Mutual fund on the other hand is
not that much volatile by nature, as the diversification is very large
and at a time 50-100 stocks are covered. Different kinds of stocks from
different sectors and market capitalization are involved in mutual fund
and the over all change in value is thus less volatile (other than
extreme days).


SIP Investment

Mutual funds are known for possibility of SIP (monthly investment). SIP in mutual fund works and is recommended as a great way for a salaried person to invest in equity markets for long-term basis without understanding the working of equity markets.

However SIP in stocks do not work. Yes, some companies provide you the facility of SIP in stocks, but it’s a terrible concept. There is no diversification and SIP in a particular stock does not make sense because the risk is with single stock. A stock can be in a bad phase for years and decades, whereas in a mutual fund the bad performing stock is weeded out.
Asset Class Restriction

Stocks investing is restricted to Stocks only. You can choose a large cap stock, mid cap stock or small cap stock, but finally it will be equity asset class. However, mutual funds can invest in mix of asset classes. There are equity funds, debt funds, gold funds, Mix of Equity and debt also. To top up, even balanced funds are there which can adjust the asset allocation on its own, so in a way mutual funds are more superior in terms of features compared to a single or bunch or stocks.


Conclusion

Mutual Funds are actually collection of stocks only but just because it’s a group of stocks the characteristics are not very similar to that of stocks. You should be clear about all the points of difference and only after that you should decide whether to invest in Stocks directly or take the Mutual Fund route.

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