Difference Between Stocks and Mutual Funds

4 min read

Introduction

One of the most common and prominent questions every fund manager is asked is “Which is the most viable investment option? Is it stocks or mutual funds? It is extremely essential to understand every investment requires 

  • Tremendous research,
  • Deliberation over your risk appetite, and 
  • Alignment with your financial goals

These aspects determine the kind of investor you are. Based on the type of investor you are, it can either work for/against you. Investing in stock, you may get access to several research reports and market information but always remember that the final decision rests with you.

While in a mutual fund, your funds are managed by a fund manager who will make the investment decisions for you with some predetermined objectives. Mutual funds provide you timely updates on your performance which are mostly available on-demand. While on the other hand, stock investments require you to actively manage your portfolio and account for changes and transaction costs.

Mutual funds allow you to start with investments as low as rupees 500 which can get invested in shares of companies which may be expensive in currency terms. While single stocks require you to carefully think and plan on how much money you intend to put in each stock.

Difference Between Stocks & Mutual Funds

BASIS OF COMPARISONSTOCKSMUTUAL FUNDS
ValueValue is determined through NAV(Net Asset Value)Value is determined through per share price.
Professional ManagementProfessional management is involvedProfessional management is not involved
LiquidityAlmost immediatelyIn 3 business days
Investment DecisionsFund managerYourself
Form of InvestmentIndirectDirect

What is Stock

A stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own. Units of stock are called “shares.”

Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundations of many individual investors’ portfolios. These transactions have to conform to government regulations which are meant to protect investors from fraudulent practices. Historically, they have outperformed most other investments over the long run. These investments can be purchased from most online stock brokers. Stock investment differs greatly from real estate investment.

Understandings Stocks

Corporations issue (sell) stock to raise funds to operate their businesses. The holder of stock (a shareholder) has now bought a piece of the corporation and, depending on the type of shares held, may have a claim to a part of its assets and earnings. In other words, a shareholder is now an owner of the issuing company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have a claim to 10% of the company’s assets and earnings.

Stockholders do not own corporations; they own shares issued by corporations. But corporations are a special type of organization because the law treats them as legal persons. In other words, corporations file taxes, can borrow, can own property, can be sued, etc. The idea that a corporation is a “person” means that the corporation owns its assets. A corporate office full of chairs and tables belongs to the corporation, and not to the shareholders.


What is Mutual Fund

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.

A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market capitalization of the fund—derived by the aggregating performance of the underlying investments.

Understanding Mutual Funds

Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio’s value. Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give their holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.

That’s why the price of mutual funds share is referred to as the Net Asset Value (NAV) per share, sometimes expressed as NAVPS. A fund’s NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding. Outstanding shares are those held by all shareholders, institutional investors, and company officers or insiders. Mutual fund shares can typically be purchased or redeemed as needed at the fund’s current NAV, which—unlike a stock price—doesn’t fluctuate during market hours, but it is settled at the end of each trading day. Ergo, the price of a mutual fund is also updated when the NAVPS is settled.


Similarities Between Stocks & Mutual Funds

There are very few similarities between stock and mutual fund namely,

  • Both are abided by market risks.
  • Risk reduction can be possible through diversification.
  • Both need tremendous research before investing.
  • The company should be public traded companies.

Key Differences Between Stocks & Mutual Funds

  1. In terms of ownership, stock of one unit can get you ownership but the mutual fund does not own any stake.
  2. In terms of voting rights, the stock holds voting rights but mutual funds don’t.
  3. In terms of returns, stock gives us dividends as return whereas mutual fund gives interest as returns.
  4. In terms of return guarantee, stock gives no guarantee but mutual gives guarantee in returns.

Conclusion

Mutual funds are relatively safer as some strict guidelines and regulations bind every asset management company to safeguard the unit holders in trust while in case of a stock though there are markets regulators a company can be non-performer which affects the portfolio.

If you want to improve your health you can either build on your knowledge and try on yourself or you can consult a doctor both approaches work but based on your needs the decision rests with you. So plan smartly and stay well invested.

Reference

References

Leave a Reply