There is no golden rule that “Mutual Funds Are Better Than Stocks” but for majority of investors you can safely say that “Mutual Funds Are Better Than Stocks” and so let us discuss more on this today. Before I begin let me make it very clear that investing in mutual fund is no difference than investing in stocks and if share market crashes today then mutual funds would also crash and the crash in funds may be more than some individual stocks.
First let me explain the concept of mutual fund in a very simple possible language.
Mutual fund is a pool of money contributed to by investors of various type and sizes. There will be a fund manager hired to invest this accumulated cash with a goal of this fund manager is to maximize return with minimalistic risks. To do this funds are primarily composed of variety of stocks but depending on the type of fund it may also include debt and other fixed income part to maximize return with minimize risks.
Mutual funds have an edge over stocks for majority of investors and so it is important to understand the advantage mutual fund have over direct investment in stock.
- Less Volatile – Mutual funds by its nature is bound to be less volatile because it is not an investment into a single company or management. This actually means that mutual funds do not have sharp movement on either side (Up or Down) like movement in any individual stock or sector.
- Diversification – Experienced investors will agree that keeping all egg in one basket is never a good option and if you can you should diversify your income potential. In mutual funds as you are not investing in any particular stock or company. Sharp movement of a volatile stock is counter balanced by other stock giving you low beta movement of your investments.
- Tax Benefits – It becomes difficult to remain invested in one particular stock for a period of one year and more and so for gains made on returns, you need to pay capital gain tax. But for mutual funds remaining invested for one year is fairly simple and so you can save on your capital gain tax. After New Direct Tax Code this will change.
- ELSS Funds – You have equity linked ELSS funds where you can save tax and still get the advantages of investing in equity market but you have nothing for investing in stocks and yet save tax.
- Managed by experts – Funds are managed by fund managers with years of experience and so they have higher chances of selecting the right stock at the right time and at the right price which may not be possible for every one of us.
- Systematic Investments – One of the biggest advantages of investing in Mutual Funds is, you have an option to invest small amounts over an elongated period of time. Check out the Benefits of SIP or systematic investment plan.
Mutual funds are not all glittering gold and they also come with disadvantages
- No trading possible – If you are not only an investor but also looking for some trading activity mutual funds is not for you.
- Fees of Fund Managers – Fund managers with years of experience come at a price and knowingly or unknowingly you are paying the price from your returns.
Over to you
Share your views and opinion in comments below.