Are Mutual Funds Better than Stocks for Long Term Investment?

Well, the short answer is any of the two can be used to achieve your financial goals but there is a catch. The catch is what this article is all about.

There are differences between using individual stocks and mutual funds for your investments and we will go over the bit of nuances of each and the cases where we might prefer one over the other.

For this discussion when we will talk about mutual funds, we will exclusively look at all-stock or equity mutual funds. Mutual funds can hold a variety of investments including equity, bonds, commodities, and other assets but in that case, it wouldn’t be apples to apples comparison to individual stocks.

Similarities

Now, as for similarities whether you are investing in mutual funds or individual stocks either way you are investing that portion of your money within stocks or equities. Due to this, we must understand that in both cases there will be an inherent risk as “All Stocks have risk” and there is no guarantee of future performance.

In both cases, we can see short-term price volatility but over the long run purchasing stocks at reasonable prices has done well for investors, which is true for mutual funds as well.

If you decide that you want to purchase your own individual stocks instead of relying on a mutual fund; you will have more direct control over which companies you are investing in. If you are investing in a mutual fund of stock particularly in Index Mutual Fund, you don’t have direct control over which stock the fund invests in. The fund might invest in stocks that you might think are overvalued or you don’t personally believe in the company.

With individual stocks, you can pick and choose companies that you believe in or you think are undervalued. Additionally, you can avoid investing in stocks that you have no interest in.

Let’s look at some initial differences between both,

Mutual Funds Stocks
New to Equity market Very well versed with the market
No Experience Experience with Equities
Can’t track companies and no idea of Indian and Global Economy Can track and find companies with great fundamentals
Can’t find time for research Keenly interested in financial data, understand various markets and risks involved
It’s the best way to learn and invest with little risk Steep Learning Curve

Advantages of Investing in Mutual Funds

  • No need to pick a stock or track stock as the expert fund manager does it for you
  • Lower cost of Investing
  • Brokerage cost for Mutual Funds is always low because of the large scale of investing and investors
  • No Need for Demat Account for Buying Mutual Funds
  • Provides instant diversification
  • If you would like the portfolio to include premium stocks like TCS, Infosys, etc. Rs. 2000 to 5000 will not make a significant difference or is rather not possible. Mutual Fund is a great option for this.
  • Short Term Capital Gains or STCG tax is not applicable for Mutual Fund companies, a benefit which in-turn is forwarded to investors

Advantages of Investing in Individual Stocks

  • Selecting individual stocks does give more flexibility for you to pick the most compelling investments that you think have less downside risk than the rest of the general market.
  • Value investing strategies and defensive investing strategies tend to outperform the market during bear markets or corrections
  • If you want more flexibility in advance of a market downturn; individual stocks might provide that option for you

Disadvantages of Investing in Individual Stocks

  • Select a great company is difficult and time-consuming
  • Tracking the progress is a deeply involved process
  • Time to Time profit booking is also important
  • Reading companies financials is a lengthy process and requires a certain interest in “Numbers”
  • Short Term Capital Gains Tax is applicable if sold under 365 days at 15%
  • After all, this due diligence investing your money is still risky
  • Always needs Risk Management

Conclusion

Picking your own stocks takes a lot more time and it’s a significantly larger amount of effort than picking a well-diversified mutual fund. In this case, if you are a person who lives a very busy life and simply doesn’t have the time or the interest to research and pick your own individual stocks then you will be better off going with a mutual fund.

It can take a fair amount of time to get to the level of understanding of a specific company where you feel comfortable and confident investing in it. Multiply that across many different stocks, you might find it’s simply too time-consuming to pick individual stocks. In that case, mutual funds can be an effective solution for you that allows you to invest without the need for you to spend time selecting each individual stock.

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