Mutual Fund Vs Stock Market Difference | How to Work with Mutual Funds

When it comes to investing, there are two popular options, i.e., mutual funds and the stock market. Both investment options come with their own features, risks, and rewards. In this article, we will explain the difference between mutual funds and stocks, and we will also explore how mutual funds work, and how a beginner can invest in mutual funds.

What is the Stock Market?

The stock market is a place where buyers and sellers come together to buy shares of publicly listed companies. When you buy stocks, you owns a small portion of a company and become a shareholder of the company. The value of your stock can increase or decrease based on the company’s performance and market conditions.

Key Features of the Stock Market:

• Ownership: Buying stocks means you own a part of the company.
• Risk: Stock prices can go up or down quickly, which creates risk.
• Control: As a shareholder, you have the right to vote on certain company matters.
• Returns: The stock market offers the potential for high returns, but also comes with the risk of losing money.

What is a Mutual Fund?

A mutual fund is a type of investment that pools money from many investors to buy a diversified portfolio of stocks, bonds, or other assets. A fund manager manages these investments on behalf of all the investors. This allows individuals to invest in a variety of assets without having to buy each one individually.

Key Features of Mutual Funds:

• Diversification: Mutual funds offer diversification by investing in a variety of stocks and bonds, reducing the risk of losing money.
• Professional Management: Mutual funds are managed by professionals who make investment decisions based on research and analysis.
• Lower Risk: The diversified nature of mutual funds helps reduce individual investment risks.
• No Control: As an investor, you don't make day-to-day decisions about which assets the fund buys or sells.

Difference between Stock Market and Mutual Funds

Here’s a table that summarizes the key differences between Mutual Funds and the Stock Market:

Aspect	Mutual Funds	Stock Market
Ownership	You own shares of the mutual fund, not individual assets	You own shares of individual companies
Risk	Lower risk due to diversification across multiple assets	Higher risk, as stock prices can be volatile
Management	Professionally managed by fund managers	Self-managed, or you may hire a broker to invest directly in stock market.
Diversification	Automatically diversified across various stocks and bonds	You need to diversify your portfolio by buying multiple stocks
Return Potential	Steady, moderate returns, depending on the fund type	High potential for returns but with higher risk
Fees	Fund management fees are charged	Brokerage fees for buying and selling stocks
Control	No control over individual investments within the fund	Full control over which stocks to buy, sell, and hold
Best For	Beginners, people seeking diversification	Experienced investors, active investors

 

How Do Mutual Funds Work?

Now, let us help you understand how mutual funds actually work; so that your foundation for money stays strong.

Pooling Money Together: Many people put their money into a mutual fund. All the money from these investors is combined into one big pool.

Professional Management: A fund manager or expert team looks after the investments. They decide which stocks, bonds, or other assets to buy, sell, or keep based on research and their goals.

Investing in Different Assets: The fund manager uses the pooled money to invest in a variety of things like stocks, bonds, or real estate. This helps spread the risk, so if one investment doesn’t do well, others will.

Diversification: By investing in a mutual fund, you’re getting a mix of different investments. This reduces risk because you’re not putting all your money in just one stock or bond.

Earnings and Returns: The fund can make money from the growth of its investments (called capital appreciation) or the income those investments generate (like dividends from stocks or interest from bonds). The money earned is given to investors, usually as more shares in the fund.

Buying and Selling Shares: You buy shares in the mutual fund, and the price of each share goes up or down depending on how the fund’s investments are doing. You can sell your shares whenever you want, but the price will depend on the fund’s performance at that time.

Who Should Invest in Mutual Funds or the Stock Market?

Both mutual funds and the stock market are considered a great investment options in India, but they are suitable for different types of investors:

• Mutual Funds are ideal for those looking for lower risk, less time commitment, and professional management.

• Stock Market suits those who are more experienced, willing to take on higher risk for potentially higher returns, and enjoy active involvement in their investments.

How to Invest in Mutual Funds?

Investing in mutual funds is relatively simple. Here’s how you can get started:

1. Choose Your Mutual Fund

Research and select a mutual fund that aligns with your financial goals, risk tolerance, and time horizon. Consider factors such as the fund's performance, management fees, and investment objectives.

2. Open an Investment Account

You can invest in mutual funds through a brokerage firm (Zerodha, Groww, Paytm money), a bank, or directly through the fund company.

3. Decide on an Investment Amount

You can start with a small amount (minimum with Rs. 100) or a larger sum, depending on the minimum investment requirement of the mutual fund.

4. Buy Mutual Fund

Once your account is open, you can buy mutual fund. Some funds may require a lump sum investment, while others allow you to invest periodically through systematic investment plans (SIPs). Few examples of best mutual funds to invest are:

• Motial Oswal Midcap Fund
• HDFC Mid-Cap Opportunities Fund -Direct Plan - Growth Option
• Parag parikh flexi cap fund

5. Monitor Your Investment

After investing, you should periodically review the performance of your mutual fund to see if it aligns with your investment goals. However, mutual funds are designed for long-term growth, so avoid making short-term decisions based on market fluctuations.

Example: Starting to Invest in Mutual Funds

Step 1: Understand What Mutual Funds Are

Step 2: Set Your Investment Goals: Let’s say you want to save for retirement or buy a house in 5 years. Determine how much money you need and the timeline for your investment. You can use Mutual Fund Calculator here.

Step 3: Choose the Type of Mutual Fund There are different types of mutual funds based on what they invest in:

• Equity Funds: Invest in stocks. Good for long-term growth but riskier.
• Bond Funds: Invest in government or corporate bonds. Generally lower risk but also lower returns.
• Balanced Funds: Invest in both stocks and bonds, offering a mix of risk and return.

Step 4: Open an Investment Account: Choose a platform like a brokerage, a bank, or a mutual fund company to open an investment account.

Step 5: Start Small and Make Regular Contributions: You don’t need a lot of money to begin. For example, you could start with Rs. 100, depending on the fund’s minimum investment requirement.

• Example: You decide to invest $100 per month into an Equity Fund with a goal of long-term growth.

Conclusion: Mutual Fund or Stock Market?

Stocks and mutual funds both have their place in investing. Stocks are best for those who can handle higher risk and want more control for potentially higher returns. Mutual funds are great for beginners or those who prefer a hands-off, diversified approach with professional management.

For beginners, mutual funds are often the better choice since they require less time and effort, and offer lower risk. As you gain more experience, you can consider investing in stocks for higher returns.

Your choice depends on your goals, risk tolerance, and knowledge. Always research or consult an advisor before investing.

Frequently Asked Questions

1. What is the minimum amount required to invest in mutual funds?

The minimum investment amount varies by fund, but it usually starts at ₹100 to ₹5,000 for systematic investment plans (SIPs).

2. How do mutual funds work?

Mutual funds collect money from investors, which is then managed by fund managers. They invest in a mix of stocks, bonds, or other securities to generate returns for investors.

3. Can I lose money in mutual funds?

Yes, mutual funds carry risks. If the market or the assets in the fund perform poorly, you could lose money, though the risk is typically lower than investing in individual stocks.

4. What are the fees involved in mutual fund investments?

Mutual funds charge a management fee (expense ratio) and entry/exit loads (fees when buying or selling units).

5. What is NAV in mutual funds?

NAV (Net Asset Value) is the per-unit price of a mutual fund, calculated by dividing the total value of the fund's assets minus liabilities by the number of outstanding units.

6. Are mutual funds suitable for beginners?

Yes, mutual funds are a good choice for beginners, as they offer diversification, professional management, and relatively lower risk compared to stocks.