When you look at it, sometimes the battle lines between the Mutual Fund and Stock believers are drawn quite strongly. There are hard core believers on both ends, often looking with disdain or fear at the other side. Like varied weapons in an arsenal, once you understand the role that both these assets play in your portfolio, you will realise the need and place for them both.
Below are 5 differences between stocks and Mutual Funds that you must know:
Stocks are more volatile, Mutual Funds are more stable
This difference is best explained through an analogy. Stocks are more like sports cars – really fast when the times are good but can go completely off track on potholes and have a serious impact on crash. Mutual funds, on the other hand, are like SUV’s be it a Land Cruiser or a Range Rover– big and stable. Even when they go off road, while they might get sluggish, they will still have the passengers safe.
Similarly, stocks might zoom up one day and on the back of even a rumour go down by quite a lot the next. Since mutual funds have many stocks making up their performance, the overall price of most of them is not swayed by company specific or industry specific news items. However, when the entire market is depressed due to macro-economic conditions, both stocks and mutual funds will be impacted though the impact on mutual funds may be more muted.
Stocks give an adrenaline rush to investors, mutual funds create wealth
There is no denying the fact that stocks are exciting. Otherwise there would be no reason for so many people to devote hours on end, staring at a computer screen, coming up with complex formulae and willing to put in bets over a single day. There is a certain adrenaline rush in looking at earning money over a short period of time. However, is it a predictable foreseeable stream of wealth? Not really. It is fun and exciting but retail investors are matched up against institutional investors with their expert research teams and contact with company personnel. In that regard, over a long term, mutual funds are known to be a boring yet predictable wealth growing asset for investors.
Stocks can show appreciation pretty quickly, Mutual Fund investment is a longer game
With direct stocks, watching it’s price trajectory is like watching a roller coaster ride. In a short span of time, you could very well see twists and turns as well as ups and downs. On the other hand, watching over a mutual fund NAV is more like watching a sapling grow. You know there is progress and you know it’s growing but there is nothing to watch. Over the longer time though, you would be able to see a fully grown tree bearing the fruit of years of patience, without that churning feeling in the stomach.
Higher risk higher return in stocks, relatively lower risk and lower return in MF
People often wonder how can mutual funds be safer if they are anyway made up of stocks? When a retail investor picks stocks, he or she is choosing out of a universe of over 5500 stocks. It is much more of a hit or a miss scenario. On the other hand, mutual funds are well diversified basket of stocks whereby there is one for every need. If you are looking for investment only in large cap bluechip companies, all fund houses have their bluechip mutual funds. If within mutual funds also, you are looking to take a higher level of risk, then small cap funds are for you. However, even in the small cap category mutual funds end up being relatively less risky than direct stock picking as the diversified stock portfolio is backed by professional equity research.
Higher time investment in stocks, less monitoring required in Mutual Funds
Mutual funds, especially from good long standing fund providers, are more of an invest it and forget it category. They anyway show a result in due course of time and watching the NAV move 1 paise each day is not required. Over the long run, most mutual funds deliver returns. However, the same cannot be said for all stocks. Enough and more stocks end up getting delisted. A lot of retail investors wake up from slumber after years to realise that some of their stock investments are merely paper or just a series of zeroes in a demat account. Stocks need to be tracked and monitored which is often difficult to juggle with our day jobs.
As you can see above, direct stocks and mutual funds fulfil very different requirements in a portfolio.
If you are convinced that you have the time and want to experience the thrill, then dabble in stock investments with a limited amount of money. Look at it as fun money that you are okay with the wild swings. Never mix your living expenses with stock investments. On the other hand, for long term wealth creation whereby you can focus on other aspects of life, mutual funds work out far better. As they say, Mutual Funds Sahi Hai.