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Stocks vs Mutual Funds: What should you choose?

To simply put, if you are investing in stocks, you are responsible for your picks. On the other hand, if you invest in mutual funds, the fund manager takes this call on your behalf. You need to be mindful of certain crucial factors before choosing either asset class to achieve your goals.

February 05, 2022 / 12:17 PM IST

Most investors face the dilemma of whether to go for stocks or mutual funds. Let's be quite clear that there's no wrong or right answer to this. The matter is entirely subjective, and pitching one against another is like comparing apples and oranges. To simply put, if you are investing in stocks, you are responsible for your picks.

On the other hand, if you invest in mutual funds, the fund manager takes this call on your behalf. You need to be mindful of certain crucial factors before choosing either asset class to achieve your goals. What are they? Let’s find out.

Market Experience

If you possess the required knowledge and experience, direct stock investment can work wonders for you. However, if you dabble in stocks only once in a while or depend on a third party for advice, you should think twice before committing. Stock investment warrants you to be an active market participant.

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On the other hand, the case is different with mutual funds. The fund manager looks after your portfolio, and even if you forget about your investments, you can still make good money. In a nutshell, mutual funds work well for passive investors who have the paucity of time and the required experience to navigate market movements and read between numbers.

Portfolio Diversification

One of the core tenets of investing, diversification helps reduce risk and balances your portfolio. A well-diversified portfolio helps ride choppy waters easily and ride turbulence with gusto. A basket of 10-15 stocks in different sectors gives you the required diversification. When you invest in a single stock, you get exposure to the domain that the company operates. For example, if you buy stocks of a technology firm, your exposure is limited to that sector itself.

On the other hand, when you invest in a mutual fund, your money is spent in diverse sectors. This is because the underlying portfolio of the fund invests in different sectors. It helps in automatically diversifying your portfolio and gives you a chance to augment returns in the long run.

Superlative Against Moderate

With stocks, you can get extreme happiness or despair. If you have a multibagger, your returns can swell in no time. On the other hand, there are equal chances of sitting on an agonising dud dragging down returns. Having said that, you can’t compare returns of a single stock against a mutual fund.

Equally essential is to note that while a mutual fund can’t double your returns overnight, a stock has the potential to do so. Returns from mutual funds are in line with broader market trends. Also, with mutual funds there are checks in place. The fund manager must follow certain mandates in line with SEBI’s regulations.

On the other hand, direct stock investment can lead you to invest in only high-yielding ones, increasing your portfolio's concentration risk.

What Should You Opt For?

You must keep an open mind and invest in both financial instruments. While mutual funds are a prudent choice for building a goal-oriented portfolio, the right stock investment can help you leave behind an inheritance to cheer.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Rahul Jain is the President & Head - Personal Wealth at Edelweiss Wealth Management.
first published: Feb 5, 2022 12:17 pm
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