InvestorQ : Why the mutual funds don't give better returns as compared to stocks?
nishi Shah made post

Why the mutual funds don't give better returns as compared to stocks?

tanvi Patel answered.
2 years ago

A mutual fund is an investment portfolio where money is pooled and from many investors and is invested in securities like stocks, money market instruments, bonds, and other assets. These portfolios are professionally managed.

Whereas, investment in stocks is done through stock exchanges and is basically ownership in equity/shareholding of the company.

Investment in equity/stocks fetch better returns for the investors as compared to mutual funds, this is so because:

A mutual fund is a combination of various securities such as debt, equity, and other instruments, which means that the return on a mutual fund is average return and not absolute. While returns on equity are absolute, it has already been established that equity has better returns. Also, returns are based on market conditions and time horizon of investment, be it mutual funds or stocks.

However, there are other factors which one should consider judging the best investment on various parameters, such as:

  1. Risk: While return on equity investment is comparatively higher, the risk involved is also higher. This is a general rule that higher the risk, higher the return. Whereas, risk on mutual funds is comparatively lower.

  2. Time horizon: Mutual fund investment is done according to one’s investment objectives, it can be either short-term, medium-term, and long-term. It can be a combination of various maturities, etc. However, investment in equity generally fetches better returns in the long run.

  3. Taxability: If you sell your investment within a period of one year, you shall be levied with short-term capital gain tax, otherwise, long-term capital gain tax. Whereas, no tax is to be levied on stocks that are sold by the fund house. Therefore, one has a substantial benefit in mutual funds.

  4. Diversification: It is a difficult task to diversify your portfolio while investing in stocks, as it would require putting money in 25-20 stocks. While investment in mutual funds is already diversified and being managed by professionals.

Therefore, for a beginner, investment in mutual funds is better as it does not require any expertise and is managed by professionals. Whereas, if one has the expertise and sufficient knowledge in the field, they can choose to invest in stocks.