Stocks Vs Mutual Funds – Differences, Returns, Risks, Performance

Stocks and mutual funds are long term investments that have the potential to create lucrative returns. Does that mean they’re similar when it comes to risk, return, and investment cost? Nope!

That’s because stocks are individual shares of companies while mutual funds are a collection of stocks. We’ll walk you through these differences in greater detail. You can consult a Cube Wealth coach or download a Cube Wealth app.

Understanding Stocks And Mutual Funds

Both stocks and mutual funds are related to the financial markets. In simple words, this means that they’re either traded on the stock market or invest in securities that are traded on the financial markets.  

1. Stocks

A stock is a share that’s issued by a publicly traded company like Apple or Wipro. Stocks are traded on a stock exchange like the S&P 500 or BSE and can be bought and sold using a brokerage account. 

You become a part of the company’s growth story when you become a shareholder. This has benefits. For example, certain companies redistribute profits in the form of dividends. 

Historically speaking, stocks have been known to comfortably outperform inflation and other assets like bank fixed deposits, recurring deposits, debt funds, liquid funds, and others. 

However, not every stock is a multi-bagger like Amazon or Microsoft. Investing in stocks requires you to analyse the financials of a company thoroughly. This might take hours of diligent research. 

2. Mutual Funds

While a stock represents ownership in a single company, mutual funds represent ownership in a portfolio of multiple stocks. A mutual fund is a pool of money that’s collected from several investors. 

The money is invested in assets like stocks, bonds, mutual funds, and ETFs. This gives you the chance to invest in a diversified portfolio of equity, debt, or a combination of both, all in one mutual fund. 

A fund manager will be in charge of the day to day buying and selling activities if the mutual fund is actively managed. Actively managed funds aim to outperform the market. 

Passively managed mutual funds don’t have a fund manager. They simply track an index like Nasdaq or Nifty. Their aim is thus to mirror the index, not outperform the market. 

Mutual funds are suitable for investors who don’t want to do the legwork. Of course, there’s a certain amount of research that’s still involved. But it’s not as heavy compared to individual stock research. 

Types Of Stocks And Mutual Funds

Stocks and mutual funds are classified based on market cap, benefits, and others.

Common Types Of Stocks

• Small-cap stocks
• Mid-cap stocks
• Large-cap stocks
• Dividend stocks
• Non-dividend stocks
• Blue-chip stocks
• Penny stocks

Common Types Of Mutual Funds

• Small-cap funds
• Mid-cap funds
• Large-cap funds
• Flexi-cap funds
• Debt funds
• Hybrid funds
• Index funds
• ELSS funds

Stocks Vs Mutual Funds: Returns

Individual stocks have the potential to grow exponentially as compared to mutual funds. One of the reasons for this is the inherent nature or limitation of mutual funds - they are a basket of securities.   

A mutual fund’s returns are tied to the overall value of its portfolio. If one or more stocks/bonds in the portfolio underperform, the overall return of the mutual fund will be dragged down. 

A stock doesn’t experience this. Let’s take for example the returns generated by HDFC stock versus mutual funds since 1999. It’s apples to oranges, in a way, but will give you an idea of how the returns differ.

*Facts & figures are true as of 20-07-2021 and have been obtained from publicly available sources online.

Stocks Vs Mutual Funds: Risks

We’ve established that stocks can potentially outperform mutual funds. But there’s a trade-off. Stocks are generally known to be a more volatile and high-risk investment option than mutual funds. 

Consider equity funds, for example. They distribute their risk across multiple stocks and even allocate a small portion of their portfolio to bonds or money market instruments. 

This diversification allows them to absorb volatility better than an individual stock. Furthermore, investments like debt funds are considered to be safer than both equity funds and stocks. 

That’s because debt funds invest in bonds issued by the government or large corporations that have a solid credit rating. Thus, investors must weigh the risk-return tradeoff before investing in stocks and mutual funds.

How Are Gains Taxed On Stocks And Mutual Funds?

Gains earned on stocks and mutual funds are taxed based on the holding period:

• Short Term Capital Gains (STCG): less than 3 years
• Long Term Capital Gains (LTCG): more than 3 years

‍
Debt and international funds are the only assets on the list that are eligible for indexation benefits after 3+ years. Indexation benefit means that the price at which you bought an asset is adjusted for inflation.

How Much Control Do You Have Over Your Investment?

You can choose to buy or sell stocks at any time. Furthermore, the onus of picking stocks will be on you, unless you have an advisor. In either case, you have greater control over your investment. You can consult a Cube Wealth coach or download a Cube Wealth app.

When it comes to mutual funds, however, the scenario is different. Investors can’t dictate what stocks or bonds can be bought and sold by a mutual fund - only a fund manager or AMC can. 

How To Track Your Stock And Mutual Fund Investments?

Tracking your portfolio’s performance is important because. Most experienced investors tend to revisit their investment portfolios every quarter. Some tend to track investments weekly or every 6 months. 

There are several online tools that help you set up a quick tracker to stay on top of your investments. Apps like Cube show you all your investments in one simple portfolio view to make tracking easier. 

Investors who prefer a more DIY approach have been known to create a Sheet or Excel file to track their investment portfolios and net worth. In any case, it’s important to understand what suits you. 

Getting a regular portfolio analysis done from trained experts complements portfolio tracking. In-depth, quarterly portfolio analysis can help you correct your course of action in case of:

• New life goals/events
• Underperforming assets
• Better investment opportunities
  

You can try Cube’s free MF analysis tool under the “Web Tools” section of the toolbar. The alternative is to consult a trained financial professional like a Cube Wealth Coach.

Should You Invest In Stocks Or Mutual Funds As A Beginner?

Logic would suggest that mutual funds are far more “comfortable” to invest in as a beginner. That’s because they don’t require as much research as individual stocks. 

However, the choice may not be that simple. Individual stock prices can skyrocket over the short and long term. Mutual funds, on the other hand, are primarily long term assets that grow best after 3-5+ years. 

Building your own portfolio of awesome stocks can lead to relatively higher returns than mutual funds. But that would require a ton of research. And let’s face it, not everyone is a financial expert.

That’s why the possibility of making mistakes when picking individual stocks is higher. However, solid financial experts do exist. They can help you figure out what’s best for you as a beginner: 

• Stocks
• Mutual funds
• Combination of both   
  

Thus, it’s important to consider your investment goals, risk profile, and other factors before buying stocks or mutual funds. Furthermore, it’s advisable to consult an expert financial advisor before investing. You can consult a Cube Wealth coach or download a Cube Wealth app.

Conclusion 

Before making a decision, it's essential to consider your investment horizon, risk tolerance, and the level of involvement you want in managing your investments. Diversification can help mitigate risk in both strategies, and you can also combine the two approaches to create a well-rounded investment portfolio.

Lastly, it's recommended to consult with a financial advisor to help align your investment choices with your specific financial objectives.

FAQs 

1. Which option is riskier, individual stocks or mutual funds?

Ans. Individual stocks are generally riskier because their performance depends on the success of a single company. Mutual funds provide diversification, reducing the risk associated with individual stock picking.

2. Which option offers better potential returns, stocks or mutual funds?

Ans. Individual stocks can offer higher returns, but they come with higher risk. Mutual funds offer a diversified approach, which can be less risky but may yield more moderate returns.

3. Do I need to be actively involved in managing my investments with both stocks and mutual funds?

Ans. Investing in individual stocks often requires more active management and research. Mutual funds, on the other hand, are professionally managed, allowing for a more passive investment approach.

4. Can I invest in both stocks and mutual funds in my portfolio?

Ans. Yes, many investors choose to create a balanced portfolio that includes both individual stocks and mutual funds to achieve diversification and balance risk and return.

Watch this video to find out more about Cube’s 9 box model to build the perfect portfolio

Other Posts You May Like: