Ananya, an educator in Mumbai, was saving this amount of ₹10,000 every month for the entire year. She wanted to put her money in good investable financial instruments to grow her wealth, but she was quite in two minds about whether mutual funds were good or stocks would be the right investment for her.
Goodbye multiple EMIs, hello savings!
Ananya who is staying in Mumbai and is also looking at options like taking a personal loan in Mumbai for refurbishing her house could achieve smart investment and savings.
What Are Stocks and Mutual Funds?
- Stocks: When you invest in stocks you buy a part of a company. If this company performs well, the stock goes up and you usually get a profit.
For example, if Ananya bought 10 shares of a company for ₹500 each and the share price increased to ₹700, she would gain ₹2,000.
- Mutual Funds: These are team efforts. All investors pool their money in a fund, and then a professional fund manager invests it in several assets such as stocks or bonds. SEBI recently suggested a new platform for mutual fund investment. With Ananya, it would mean that if she invests ₹10,000 in a mutual fund, the fund manager will do the rest and spread her investment across 20 different companies.
How Do They Compare?
To understand the key differences, let’s look at this table that Arjun showed Ananya:
| Feature | Stocks | Mutual Funds |
| Ownership | Directly own shares in a company | Own units of a diversified portfolio |
| Management | Self-managed; requires time and research | Managed by professional fund managers |
| Risk | High (depends on company performance) | Lower (diversified investments) |
| Return Potential | High but volatile | Moderate but stable |
| Fees | Brokerage fees | Management fees (expense ratio) |
| Tax Benefits | None (except long-term capital gains rules) | Some (ELSS funds allow tax deductions) |
Why Is Diversification Important?
Arjun explained diversification using an example. Imagine Ananya owns shares in just one company, and that company performs poorly. She might lose a lot of money. But if she invested in a mutual fund, her money would be spread across multiple companies. Even if one company underperforms, others might do well, balancing the loss.
However, if she had invested in a mutual fund, her money would be couched in quite a number of companies. So even if one may perform poorly, others are expected to generate satisfactory returns to offset the negative impact.
Costs: Hidden or Transparent?
- Stocks: Ananya noticed that every time she bought or sold a stock she had to pay brokerage fees for it.
For example, if she has to make 10 transactions within the month and has to pay ₹50 for each, she will end up spending ₹500 just on fees.
- Mutual Funds: Mutual funds have costs, such as management fees, but these are usually lower because of economies of scale.
Which Option Matches Your Style?
- Stocks:
- Best for people who enjoy researching companies.
- Best suited for risk-takers with a tendency to seek high returns.
- For example, Ananya can invest in shares of a tech company considering it will expand quite rapidly in the next 5 years.
- Mutual Funds:
- Ideal for beginners or people with limited time.
- Most favorable to persons who seek professional management.
- For example, if Ananya invests ₹50,000 into a mutual fund, the fund manager will decide how to allocate it wisely.
Tax Benefits: A Win-Win Situation
- Investors can claim deductions of up to ₹1.5 lakh under Section 80C against their income on mutual funds like the equity linked savings schemes (ELSS).
- Stocks, on the other hand, do not offer such tax benefits.
Conclusion
So, what did Ananya decide? She chose a balanced approach. She invested 70% of her savings in mutual funds for stability and professional management. The remaining 30% went into stocks for higher returns. In this way, it would have to be that her wealth grows and her risks are limited.
For you, the choice is mutual funds or stocks, depending on your knowledge, time, and risk of loss. Start off with a small amount, diversify, and let your investments work for you. As Arjun said, “Investing is like planting a tree-water it regularly, be patient and watch it grow.
