What is the difference between stock market and mutual funds? Which is better?

difference between stock market and mutual funds

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Shares and mutual funds are commonly utilised investment vehicles within financial markets. They each play an important role in investors matching options to their distinct needs and preferences. A prudent approach combines both in a balanced, goal-oriented portfolio.

Before diving into which option may be preferable, let’s understand what mutual funds and the stock markets are.

What is a mutual fund?

A mutual fund is an investment vehicle that pools money from investors to purchase securities. Professional fund managers select a portfolio of stocks, money market instruments, and other assets to achieve the fund’s stated objective.

Mutual funds in India allow individual investors to diversify their holdings across various securities and asset classes by purchasing a single mutual fund investment. The fund manager makes all asset allocation and stock/bond selection decisions for the fund’s shareholders.

What is stock market?

Stock markets allow investors to allocate capital across various investment vehicles. Equity exchanges facilitate the public trading of company shares, while bond, futures, and derivatives markets allow exposure to price movements in their respective underlying assets. Regardless of one’s preferred asset class or online investment strategy, exchanges aim to offer suitable products and avenues for profitability.

The Securities and Exchange Board of India (SEBI) regulates the financial markets in India. Established in 1992 through the SEBI Act, the organisation administers stock exchanges, oversees market participants, and safeguards transparency. SEBI’s purview includes overall governance, compliance inspections, and rulemaking to ensure the fair and orderly functioning of the capital markets. SEBI cultivates trust and participation among all investors through its supervision and guidelines.

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Which investment is better – mutual funds vs stock market?

Here are the differences between mutual funds and the stock market –

Aspect Mutual funds Stocks
Ownership Investors own units or shares of a portfolio Investors own shares representing ownership
Investment style Diversified portfolio managed by professionals Individual stocks represent specific companies
Risk Diversification helps spread and mitigate risk Risk is concentrated in individual stock choices
Management Professional fund managers make investment decisions Investors make individual buy/sell decisions
Return on investment (ROI) Reflects the performance of the entire portfolio Reflects the performance of the specific stock
Liquidity Comparatively more liquid due to continuous trading on the market Liquidity can vary; some stocks may be less liquid
Entry barriers Lower entry barriers, making it accessible for smaller investors May require a significant capital outlay for a diversified portfolio
Decision-making Less involvement in day-to-day decisions, managed by experts Requires active decision-making and research by individual investors
Ownership rights Limited influence on decision-making of the fund Shareholders often have voting rights in company decisions

To wrap up

Whether stocks or mutual funds are a more suitable investment depends on one’s financial objectives and risk capacity. When first entering the world of equity markets, consider allocating a modest sum to gain exposure and familiarity with the volatility inherent in such vehicles. With time and experience, investors will learn to make informed decisions and build wealth through investing.

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