WHAT IS THE DIFFERENCE BETWEEN STOCKS AND MUTUAL FUNDS?

Invest in stocks or mutual funds (MFs)—this is a question that crosses the minds of most investors. There is no either/ or response and depending on what investors expect to achieve from both these instruments, they can choose the one that is most suitable. An easy way to understand the difference between the two is a meal at a gourmet restaurant versus one at a fast food joint. Mutual funds are like fast food—well packaged, offering a mix that can help you quickly address your hunger.

Stocks, on the other hand, like a gourmet meal, involve a lot of intricate steps in preparation. At a fundamental level, when you invest in a stock, you invest in a company, a business, which means your investments solely depend on how the company fares. In contrast, in an MF, you invest in a mix of asset classes such as equities, debt, commodities and cash, depending on the stated objective of the fund.

As an investor, the upside of investing in a mutual fund is the automatic diversification that you get, which is basically spreading your money across different asset classes, sectors of the economy and size of companies. Moreover, MFs pool money from many investors and are managed by experienced fund managers who are in the business of money management. However, when it comes to stocks; it is left to you to select it, know when to invest in it and when to sell it. More importantly, how much money you have plays a role in how much stock you can own in a company.

For instance, if you have Rs 10,000 to invest and if you have shortlisted three stocks that are trading at Rs 100, Rs 150 and Rs 250; you can own an equal 20 stocks in each of them. However, in a mutual fund scheme which has the NAV (net asset value) of each unit at Rs 175; you can own 57.14 units. Now, a typical equity MF portfolio invests in anywhere upwards of 30 stocks, which means you have invested in about 10 times the stocks you would have otherwise managed if you had stuck to only stocks.

Moreover, you can invest in an MF for as less as Rs 500 a month and there is a lot more flexibility available compared to stocks. For first-time investors, MFs may be a better option considering one needs to spend a lot of time when investing directly in stocks. One can develop skills to pick stocks once one gains some experience and then decide which of the two options works. ■