18th April 2021
Finance

Mutual Funds vs. Stocks: Risks and Returns of Each

Earning money is difficult, but investing your earned money is even more difficult. If you are thinking of investing in mutual funds or stocks then you can go for small-cap stocks at the beginning from reputed banks or some good non-banking companies as well.

In this fast-moving world where everyone is very hungry towards earning a lot of money, one should know how to invest them wisely as well. Who wants their hard-earned money to get wasted? So, channelizing the money is important.

The main attraction in both cases of mutual funds and stocks is how to increase the invested money. In this article, we would show how mutual funds and stocks differ and relate to each other at the same time.

Most of the people do not have a clear idea of how mutual funds and stocks work and how one can grow their invested money wisely. In both cases of stocks and mutual funds, it is easy to buy and sell it off as per convenience. A mutual fund is also a way by which big investors invest their money to get a handful of benefits in the future.

Let’s have a look at what mutual funds and stocks are all about and how it is beneficial to the people. There are 3 types of Mutual Funds to satisfy the needs of the people:

Growth or Equity mutual funds

  • Investment is done in different company’s’ shares
  • The aims of this fund are an appreciation of the capital and the creation of wealth.
  • Long term benefits with good returns are the key points of this type of mutual fund
  • Big businesses are run by big or large capital funds
  • Medium businesses are run by big or medium capital funds
  • Some invest in either large, medium or small companies which are called Multicap mutual funds.

Income/ bond/ fixed income funds

  • Investments are made in fixed securities like Government securities, certificates of banks and some more.
  • These are the best and safe type of funds that help in the generation of income

Hybrid funds

  • Investment is done in incomes that are fixed and also in equities. They offer the best way of income generation and also offer better growth than others.

Let us look into the advantages and disadvantages of investing in mutual funds:

Advantages

  • The flexibility of investment and better liquidity.
  • The excellent way of managing your investment by an expert, so that you get great returns in the long run.
  • The amount invested can be small or big, based on the convenience of the investor.
  • Easy accessibility is a key point. Mutual funds are accessible from any parts of the world to buy, sell or even keep a track of the regular ups and downs.
  • Safety is another important point in investing in mutual funds. It gives clarity to the investor as well and he can clear out his doubts at his best to gain trust in the sector.

The disadvantages:

  • The major risk lies with the market fluctuations
  • The risk of inflation as in losing the power of purchasing
  • If there is a rise in interest rates, then mutual funds are expected to deteriorate in values.
  • If a company, be it banking or non-banking sector, is not reliable to invest in, then a risk arises or maybe a fraud.

Stocks

Stocks are a bit different than mutual funds, it’s totally up to you, where you want to invest in. If you buy a company’s stock that means you are getting a small ownership share of that company. The main reason remains the same, that is to earn a good amount of money from the invested amount. If one plans to buy a stock, he/she can buy it from the company itself and no involvement of a third party is required. Let’s discuss some more benefits of investing in stocks:

  • The 2 big names in the stock market, BSE and NSE contribute much in this sector. Most companies trade with these 2 and this gives high liquidity. So, buying and selling any product on stocks becomes easy.
  • The stock market offers a lot of sectors to invest on, be it mutual funds, shares, bonds and much more. So, one can choose from a wide range of products.
  • In a small period of time, returns are quite high, if compared to other investment plans.
  • Investing in stocks provides ownership of a portion of the particular company and this, in turn, helps both the company and the investor at the time of crisis.

The risks:

  • Risk during market fluctuations
  • Risk arises if the company is not reliable enough and are high on debts
  • The tax fluctuations can cause serious risks
  • Interest rate fluctuations in both Indian and Global market affects the stocks
  • Risks arise when the products which are regulated stringently like pharmaceuticals or telecommunications or beverages get impacted.  
  • The rate of inflation also affects the stock market much.

There are pros and cons of everything if you look around! Here, some banking mutual funds such as SBI mutual funds, ICICI Mutual Funds, HDFC Mutual Funds, Kotak Mutual Funds and stocks come with a handful of benefits and serve the people in their ways, which is different from each other. The main target of investors while investing in these 2 sectors, is to grow the invested money over time. But if compared, mutual funds are more secure and less risky than stocks.

Now it’s time for you to decide wisely!