Nowadays, end number of investment avenues are available before investors. New investors often suffer a dilemma, that whether they should invest in mutual funds or go for individual stocks. There is a big difference between these two investment vehicles as in mutual fund is a pooled investment scheme, which can be a collection of stocks or bonds or any other short term money market instrument or the combination of all of these. On the other hand, the stock is simply a class of asset, that provides ownership interest to the investor in the company. So, here we have compared and contrasted these two investment options. Have a look.
Content: Stocks Vs Mutual Funds
|Basis for Comparison||Stocks||Mutual Funds|
|Meaning||Stock is the collection of shares held by an investor, representing his/her proportion of ownership in the company.||Mutual Fund implies a fund operated by the asset management company that pools money from numerous investors and invests them into basket of assets.|
|Ownership||Shares in a company||Shares in a fund|
|Trading||Throughout the day.||Once in a day|
|Managed by||Investor||Fund manager|
|Value||Price per share||Net Asset Value|
Definition of Stock
The stock is an asset class that indicates the ownership in a joint stock company. In the capital market, many companies issue shares (unit of stock) to raise capital from the general public. The total value of all the outstanding stock is equal to the value of the company. So, when an investor purchases the stock of a company, he is actually acquiring the portion of ownership in the company in the form of stock.
An increase in the value of company’s shares results in the increase in the investor’s profit and reverse can also happen. There are two types of stock, i.e. common stock and preferred stock. These are first offered for subscription through an IPO (Initial Public Offering) and after that traded on an exchange.
Definition of Mutual Fund
Mutual Fund refers to a collective investment vehicle; that pools money from several investors for the purpose of investing it in the capital market. Making investment in mutual fund scheme means that the investor is becoming a part-owner of the investments held under that scheme. It is a trust constituted under the Indian Trust Act, 1881 and incorporated with Securities and Exchange Board of India (SEBI). The investors are the beneficiaries, who invest in various schemes of the fund.
The fund is classified into three categories which are:
- By function
- Open Ended Fund
- Closed Ended Fund
- By portfolio
- Equity fund
- Debt fund
- Special Fund
- Ownership funds
A professional money manager manages and controls funds on behalf of unit holders called fund manager, who gets fees in return. The fund manager invests money in various securities, as per specific investment objectives., disclosed in the offer document. At the end of every business day, the Asset Management Company (AMC) calculates the Net Asset Value (NAV) of the fund. NAV is nothing but the total asset value of fund per unit.
Key Differences Between Stocks and Mutual Funds
The points given below are vital, so far as the difference between stocks and mutual funds is concerned:
- The collection of shares, which are owned by an investor signifying his/her proportion of ownership is called stock. A fund managed by the investment company that pools money from numerous investors and invests them in the basket of assets like equity, debt other money market instrument is called mutual fund.
- While stocks are a form of direct investment, mutual funds are an indirect investment.
- Stocks offer ownership stake to the investor in a company. On the other hand, mutual funds offer fractional ownership of basket of assets.
- In the case of stocks, trading is done throughout the day when the market is open. As against this, trading is done only once in a day, in mutual funds.
- The management and administration of stock are done by the investor himself. Conversely, the fund manager manages and administers mutual funds.
- The per share price multiplied by the number of shares is equal to the value of stock held by the investor. On the contrary, the value of the mutual fund can be measured by calculating NAV, which is the total value of asset net of expenses.
- Mutual Funds are comparatively less risky than stocks, due to the presence of diversification.
While in stock, all the profit earned by the investment is your and so as the loss. In mutual funds, the profit earned by the investment is divided into all the investors, likewise loss too, on the basis of their proportion. Both the investment vehicles have their pros and cons, and so we cannot say which one is better than the other. If you are a small investor, then the mutual fund is the best option for you, while if you can invest a huge amount stocks are a more preferrable option for you than mutual funds.