Whenever any person says equity, there are two different things that come to his mind – stock or equity mutual fund. Whilst a single stock or a mutual fund, both of these elements come under the category of equity and both of them are considered to be a good option for long-term investment, needing a periodic review, there still exists a number of differences between stock and mutual fund investing done by a common man.
The financial scenario today has opened a number of opportunities for an individual to invest. This has gradually increased the number of investors and a majority of investors are now investing in one financial idea or the other. While the veteran investors are well-versed with the concept of investment and financial risks, the new investors on the contrary often suffer a confusion and dilemma regarding making their investments. They are often confused over whether they should be investing in the mutual funds or be going with the idea of investing in the individual stocks. Both these investments are different from one another.
Before jumping into figuring out the differences in between both these financial vehicles, it is very important to know what actually both of these mean.
Definition of Stock:
The stock is considered to be an asset class which indicates the ownership of an investor in a joint stock company. In the capital market, a number of companies keep sharing issue shares or the unit of stock, which is majorly done with a view of raising capital from the general public. The total value of all the outstanding stock is equal to the concerned value of the company. Thus, whenever an investor purchases a stock of the company, he is actually going to acquire the portion of ownership in the company in the form of stock.
An increase as to the value of the shares of the company results in the increase into the profit of the investor, likewise reverse can also happen in this particular process. The stocks are majorly of two types – the common stock as well as preferred stock. Both of these are firstly offered for subscription by the way of an Initial Public Offering also known as IPO and are later traded upon an exchange.
Definition of Mutual Fund:
Mutual funds are another machinery of financial system which refers to a collective investment vehicle. Mutual funds pool money from a number of investors for the sole purpose of making an investment into the capital market. Investing in a mutual fund scheme refers to the fact that the investor is turning into a part-owner of the investments which are held under that particular scheme. It is a trust that has been constituted in the Indian Trust Act, 1881 and the same is incorporated with the Securities and Exchange Board of India (SEBI). The investors are known to be the beneficiaries who make investments in a number of schemes of the fund.
The following are the important point of differences in between the two financial vehicles:
When any investor invests in a single stock or a number of stocks, this modification in the total value becomes too high. On a specified day, the same can become highly volatile. It can fetch you 20 percent returns and sometimes even 10 percent losses, depending upon the financial environment. This entire process could be very exciting and at the very same time, the same could be very disheartening which gives an investor a feeling that he needs to act fast in order to balance things out.
On the other hand, mutual funds are not very much volatile or vulnerable in nature, as the diversification of these mutual funds is considered to be very large, and at a time around 50-100 stocks are covered. Various kinds of stocks from various sectors and market capitalization are thus involved in the process of mutual funds and an overall change in terms of value is therefore less vulnerable and volatile in nature, other than all the extreme days.
- Return Potential:
Although volatility and return potential of these financial machineries in the financial market is looked upon as one and the same thing, there still exists a slight difference in between the two. Making an investment in equities directly serves and investor with a number of advantages, however all these happenings require a lot of work as well as analysis along with patience and belief in terms of what you have picked. Thus, if an investor is looking forward to seeking good returns within a short time period and he believes that he can research well, he can easily pick the option of investing into it directly.
Mutual friends, on the contrary, are considered to deliver fair returns. Thus, an investor can look forward to expecting some handsome returns from the mutual funds, however not unbelievable like stocks return. This happens mainly because the money is diversified across a number of stocks and an opportunity of all of them turning into a huge success in a short time becomes impossible.
- Monitoring Required:
Investing in a stock is considered to be a personal affair and an investor does it on his own and hence the decision of selling and buying totally depends upon him. Even in the case of long term investment, an investor is still required to keep an eye on every quarter or financial year unless he has really spent a good time in choosing a good stock. An investor is required to update himself about the news and the sector specified developments.
Monitoring in the mutual funds is considered to be low because the task of monitoring is eventually done by the fund manager who is paid a salary in order to filter via fluctuations. He perpetually adds as well as removes the stocks from the portfolio. This could be considered as a positive point, however sometimes it can lead to a negative perspective as well, provided if there exists a lot of churning.
- Investment in SIP:
Mutual funds are mostly known for the possibility of SIP (monthly investment). SIP in terms of mutual funds work and is recommended as a good way for any salaried person in order to invest in the equity markets for long-term basis without actually understanding the context of working of the equity markets.
On the other hand, SIP in the stock markets do not work at all. Some of the companies fetch you the availability of SIP in stocks, it is still considered to be a doubtful idea. There doesn’t exist any sort of diversification and SIP specifically in a stock does not make any sense, because the risk is always very high in terms of single stock. A stock could be in a bad phase for a lot many years and even in decades, whereas in the mutual funds, the underperformed stocks are mostly weeded out.
- Asset Class Restriction:
The investment in stocks is limited to stocks only. An investor can pick a large cap stock, mid cap stock and even a small cap stock, but eventually it would be considered to be asset class.
Mutual funds, however can invest in a combination of asset classes. There are debt funds, equity funds, gold funds, mix of debt and equity funds and many others. At the same time, even balanced funds are there that can adjust the allocation of the assets on its own. Thus, in a way mutual funds come out as more superior when compared to single or bunch or stocks.
Mutual funds are literally a collection of stocks only, but only because they are a group of stocks, the characteristics aren’t considered to be very similar to that of the stocks. An investor should therefore be clear about all kinds of points of difference and only after that is done, he should decide where exactly to invest.