Stocks vs Mutual Funds: Which Option Gives Better Returns and Lower Risk for Indian Investors?

Stocks vs Mutual Funds Which is Better for Indian Investors? Stocks and mutual funds both are one of the best investment options to go with, if you want to grow your wealth over time. Both stocks and mutual funds options have their own advantages and disadvantages and the right choice usually depends on how well you research the market, what are your investment and financial goals, and how much risk you’re willing to take during investments.

Let’s dive in and understand the fundamental difference between stocks and mutual funds, compare their risks and returns in the market, which option will help you pick the one that suits you the best.

What Are Stocks?

Stocks are like small pieces of publicly traded companies in the market. When you buy a share of any company in the stock market, then you’re actually the owner of that small part of the company.

If the company does well in the market and in the future, then the stock price regularly goes up and that is how your money grows over time. Some companies also provide you a part of their profits on a regular basis as well, which is called dividends.

Key Points:

• You can buy stocks directly from the BSE or NSE, which are the two significant stock exchanges in India.
• The prices of stocks frequently go up and down in the market every day, which depends on what investors are feeling about the market, what’s going on with the economy, and how the company is performing over time.
• Some widely recognized stocks in India include Tata Motors, Infosys, Reliance Industries, and many more.

What Are Mutual Funds?

Mutual funds are an easy and simple way to invest your money. A professional fund manager collects money from many investors and invests it into different investments like stocks, bonds, or other assets. There are different types of mutual funds:

• Equity-based, which invest most in shares
• Debt-based, which invest in fixed income like bonds
• Hybrid, a mix of both

You can start investing in mutual funds in two methods:

• By a Systematic Investment Plan (SIP), which is a small regular investment
• By a lump sum, which is a one-time bigger amount

Some well-known mutual funds are SBI Bluechip Fund, HDFC Flexi Cap Fund, and Axis Midcap Fund.

Returns: Stocks vs Mutual Funds Which is Better for Indian Investors

Let’s explore which option can give you better returns over time.

Stocks: Higher Return Potential 

If you choose good companies, then stocks can give you high returns, sometimes even in double digits every year. Companies like TCS, Asian Paints, and HDFC Bank have given huge long-term returns in the past.

But keep in mind that stock market returns are not fixed. They mainly depend on your knowledge, research, and timing.

Mutual Funds: Stable and Managed Returns 

In the long-term, equity mutual funds have given around 10% to 14% of returns every year. Some funds are regularly managed to beat the market, while index mutual funds simply follow the market’s performance.

Because mutual funds invest in multiple stocks, they lower the risk of any one stock which is performing low by diversifying the investments.

Conclusion: 

If you know how to manage and choose your investment in the market, then stocks can often give you higher returns. But if you want expert management and steady growth for a long time,  then mutual funds are a simpler and safer choice, mainly if you’re just starting your investment journey as a beginner.

Risk Factor: Stocks vs Mutual Funds

Stocks: High Risk, High Reward

• Stocks go up and down quickly in the market, which mainly depends on market news and investor mood.
• One wrong step can cause a big loss.
• You need to give time, do proper research, and control your emotions.

Mutual Funds: Lower Risk, Diversified Portfolio

• Mutual funds distribute your money across many investments, so the risk is low.
• Expert fund managers handle all your investment and reduce losses when the market falls.
• A good option to choose if you don’t want to take big risks and prefer stable growth.

Conclusion: 

Stocks have high risk but can produce higher returns. Mutual funds are safer options because they invest in multiple places, which balance out the risk.

Control & Flexibility 

• Stocks give you total control. You decide which shares to buy, when to buy them, and when to sell them.
• In mutual funds, a fund manager makes investment related decisions for you. You don’t have to pick individual stocks yourself.

If you can research the market and like doing things on your own, stocks might be the better option. But if you don’t want to worry about the market behavior every day, then mutual funds are a more stress-free option to choose.

Liquidity & Tax Implications 

Liquidity:

• You can sell stocks anytime when the market is open, which makes them easy to convert into cash.
• Flexible mutual funds are also easy to redeem cash whenever you need money.
• ELSS (Equity Linked Savings Scheme) mutual funds have a lock-in period of 3 years and you can’t take out your money before that.

Taxation:

• In stocks, when you sell after holding for more than 1 year, the profit is taxed at 10% called LTCG (Long-Term Capital Gains Tax). When you sell within 1 year, you pay 15% short-term capital gains tax.
• Equity mutual funds follow the similar tax rules as stocks.
• Debt mutual funds taxation is based on your income slab if you sell them before 3 years.

For more on taxation rules, refer to the official Income Tax India guidelines.

Conclusion:

Both stocks and mutual funds give you good liquidity and are liable to capital gains tax. But ELSS funds not only help you invest but also help you save tax under Section 80C, which makes them a great option for tax-saving.

Who Should Choose What?

Choose Stocks if You:

• Understand how the stock market works and have time to research companies.
• Are okay with taking big risks and facing ups and downs in the short term.
• Want to make your own decisions and want full control over your investments.

Choose Mutual Funds if You:

• Just starting out or don’t have much time to research the market.
• Prefer experts handling your money through fund management.
• Want to invest regularly with SIPs and grow your money for long-term goals.

Stock vs Mutual Funds: Quick Comparison 

Final Thoughts 

Both are good options to choose when it comes to choosing between stocks vs mutual funds. It really depends on what type of investor you are, how much risk you’re willing to take, and what your financial goals are.

If you have just started your investment or want a safer way to grow your money, then mutual funds are a great option to choose.

If you are experienced and don’t mind taking risks for higher returns, then you can consider investing in stocks.

Actually many investors in India like a mix of both by putting more money into mutual funds for steady growth and investing a smaller amount in stocks to earn higher returns.

FAQs

Are mutual funds safer than stocks for beginners?

Mutual funds are usually safer options for beginners, as they are managed by fund managers.

Can I get better returns from stocks than mutual funds?

It’s possible to gain higher returns from stocks, but it needs a full depth of research, experience, and the skill to handle risks.

What is the minimum amount needed to invest in stocks vs mutual funds?

You can start your investment in stocks with a price of just a single share. For mutual funds, you can start small with a SIP of just ₹500 per month.

Do mutual funds also invest in stocks?

Yes, mainly equity mutual funds. They invest your money in a mix of stocks of various companies.

Is it better to invest in SIPs or stocks monthly?

For regular savings and stable growth, SIPs in mutual funds are a better option to choose. It helps in averaging costs and building wealth over time.