Mutual Funds VS Equity Stocks: Which One is Better?
Many people have a misconception that mutual funds are like any other stock of the companies and they consider investing in them equivalent to investing in the equities. But there is a huge difference between both of them. Here we have fully explained the concepts of mutual funds and equity stocks for you to gain wider knowledge on the same.
Individual stocks or shares are the capital owned by the promoters or the owners of the companies. This capital is invested in the company for its smooth functioning and the profits generated are either distributed as dividend or are ploughed back in some other project. The individuals who purchase these shares become the owners of the companies and earn considerably higher returns over a period of time. Hence, investments in the equity shares provide all the majorly expected benefits.
Going further, let us understand what mutual funds are all about. Mutual funds are the programmes which are designed by the asset management companies in a highly professional manner. The fund managers pool the funds of various investors and put the same in multiple strategies to fetch returns. Furthermore, the strategies in which they make investments include the equity stocks of the companies as well. The fund manager on behalf of the investor puts the accumulated money in the shares to earn capital gain over a period of time. So when both of these above programmes invest in the equity stocks of companies only to earn returns, then why are they termed differently? This is what we actually need to understand about.
Although equities and mutual funds have the same criterion to gain returns, they have certain differences as well due to which the latter is considered more profitable than the former. Thus, the question arises that when equity stock itself provides many benefits to the investors, then why are mutual funds more preferred?
One of the reasons that we can reckon is “Diversification”. In the case of mutual fund investments, a fund manager pools the money of various investors and invests the same in securities of multiple companies. With this, the funds are diversified, and the risk exposure is reduced. Furthermore, the professionals who are indulged in designing the mutual fund programmes offer a high degree of worth to the portfolio which helps in generating aspired returns. Where individual equity investments are considered riskier, mutual funds helps in countering such a risk in a planned manner.
Moreover, there are several other reasons which make mutual fund investments a prior choice for global as well as Indian retail investors. Following are some of the major benefits of mutual funds over equities:
Professional Management: The most important point of consideration is the professionalism which is provided by mutual fund managers to the investors. We often lack the knowledge of managing the funds in a prompt manner and thus look for advice from some external parties. Here, our money is handled with effectiveness by authorised experts who assure higher productivity of the investment portfolio.
Diversification: The next reason which makes mutual fund different from all the other investment programmes is diversification. In the case of individual equity investment, one gets shares and securities of a single company, and the risk and returns are entirely dependent on that enterprise’s functioning. But in the case of mutual funds, the money is diversified in a manner that proportionate investments are made in various entities at the same time to reduce the risk exposure. In addition to this, the returns are also comparatively increased.
Convenience: The investment made by retail investors in the equity shares directly involves a lengthy procedure which is often tiresome. On the other hand, mutual funds offer a high rate of feasibility and flexibility to the investors to make the best use of their monies.
Lower Cost: Last but not the least is the cost effectiveness which is offered by the mutual fund programmes. Investors need not make extra payments for different charges and fees with which they make reasonable investments and save their cash. The trading cost which almost cancels the returns gained is totally reduced by making a mutual fund investment.
Equity investments have outperformed various asset instruments over the long-term around the world. And when they are made via mutual funds they perform even better. Therefore, retail investors in India must realise the importance and advantages of the same and take a strong decision of investing in them. Better regulatory environment and improved corporate governance would add high worth in one’s portfolio and would generate higher profits for the investors.
At MySIPonline, we are convinced that Mutual Funds offer the best option for retail investors to participate in Equities instead of direct investment in stocks. With a robust institutional and regulatory structure, we believe that they will continue to maintain this position in the market for a longer period in the future.
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