Mutual funds vs Stocks - Benefits, Risks, and Gains

With so many options at your disposal, investing can become a very complex and overwhelming activity. Especially when you must choose and decide upon the best option to grow your corpus and avoid risks that are basically part of the deal. However, there is a way to avert risks and ensure that your wealth growth is steady and healthy – mutual funds. Here is why investing in mutual funds is far more beneficial than investing directly in shares.

Before we go into the benefits, let us first quickly understand what are mutual funds? As is quite evident from its name, mutual funds are an investment tool that pools in money from several different individual investors and puts them in financial instruments such as shares, real estate, bonds, etc. Mutual funds allow investors to pick and choose between the available options to meet their long-term financial goals.Mutual funds are ably managed by well-experienced fund managers who are appointed by the AMCs. It is the responsibility of the fund managers to allocate funds amongst different assets to ensure that the goals are met.For this service, AMCs charge the investors a fee also known as an expense ratio. Amongst the many benefits that an investor gets, by choosing a mutual fund, are lower costs, convenience, lower risks, diversifications, and more. Let us now look at the major benefits one by one.

1. Diverse Portfolio

Any funds manager or investment professional worth his salt will tell you that to lower the chances of risk involved with investment is to have a diverse portfolio. That is the investor must not put all his money in just one option or industry. To achieve this, when investing just in shares will require you to buy a minimum of 20 stocks from different industries. By doing so, you will be able to eliminate a major portion of the risks involved, leaving behind mainly systematic risks and market risks. However, buying 20 different stocks will not be an easy thing.Investing in a mutual fund can be far beneficial in this scenario. With the help of a mutual fund, the investor can easily diversify their investments. You can choose a fund that is managing a pool of 20 or more varied securities from as many sectors. If you wish to have a similar portfolio by investing just in shares/stocks, it will require you to shell a larger capital.

2. Lower Costs

Frequent buying and selling of stock options can quickly diminish the gains made by the investor. To avoid this, an investor must try and find stockbrokers who charge a lower fee. In the case of mutual funds, this cost is divided equally amongst all the investors, which help in lowering the costs drastically.

3. Professional Expertise

Trading in stocks regularly and making a profit from it requires tremendous experience and expertise. An investor must be acutely aware of risks involved, return on the trade-offs, etc. to remain afloat in the market. Mutual funds provide this expertise to their investors at a little to no extra costs by having professional fund managers managing the entire portfolio. The managers are equipped with years of experience and expertise to choose the right securities and deliver returns efficiently.

4. Product Diversity

As opposed to a singular stock option, mutual funds offer a wide range of investment options to choose from. Depending on the investors’ long-term financial goals and objectives, s/he can pick and choose. Mutual funds also keep in mind the varying risk appetites of the investors and thus offer funds, such as equity funds and debt funds, that are both high-risk and low risk. The third option of low-risk investment with a comparatively high return is also available in the form of hybrid funds.

5. Investment Modes

Like the diverse product portfolio, mutual funds also provide flexibility in terms of investment/withdrawal method for the investors. You can choose between lump sum investment, systematic transfer plans, systematic investment plans, or SIPs, move your corpus from one scheme to another, and more. Furthermore, you can opt for a dividend or growth option depending on what you wish to do with the earnings made.

6. Induces Discipline in Investment

Share markets are a highly volatile place, and the prices of stocks go up and down in a very short time. This can trigger the investor to quickly buy or sell stocks in order to reap benefits or avoid losses. However, in the long term, this methodology can prove detrimental to building a healthy corpus. This is where the SIPs option available with mutual funds can play a huge role in creating a disciplined attitude towards investing and creating wealth.Though trading in stocks on your own can give you the thrill of being in the driver seat, it might also result in incurring heavy losses. However, if you are not in a rush and would like to see your wealth grow at a healthy pace while avoiding huge risks, then investing in mutual funds can be far more beneficial than investing in just shares.Moreover, you can choose to invest aggressively or passively with mutual funds depending on your risk appetite and financial goals.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.