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Ventura Wealth Clients
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Awareness about financial assets such as Stocks and Mutual Funds has been on the rise in India. The net monthly demat account additions have been strong despite a reasonably large base, and India now has 13 crore demat accounts. 

However, opening a demat account is one thing and building a profitable portfolio of stocks and mutual funds is quite another. The journey starts with getting the basics right…

Stocks Vs mutual fund: what’s the difference?

AspectStocksMutual Funds
What you get?By investing in a stock, you become a part owner of a company. Equity is an asset class and when you invest in stocks, you essentially take the direct route to investing in equity as an asset classA mutual fund isn’t a separate asset class. In fact, a mutual fund acts as a vehicle that helps you invest in various asset classes in an indirect way. For instance, equity-oriented mutual funds can help you take exposure to equity markets while Debt funds may help you invest in bonds, government securities, etc. 

When you invest in a mutual fund scheme, the fund invests that money on your behalf and issues units against your investment amount 

Returns potentialHighDepends on that category. An equity scheme may have a higher return potential as compared to a debt scheme
Risk involvedHighAgain, depends on the underlying offering. An equity fund will expose you to a high level of risk as compared to debt fund that may carry lower risks
Are returns guaranteedNoNo
What’s the ideal investment horizon?At least 5 years if you are an investor. Traders may have a shorter time horizonDepends on the type of a scheme. Overnight funds can be bought just for a couple of days. But if you invest in equity funds, you must have a longer time horizon - 3 to 5 years, at least
Do I need a demat account to invest?Yes. Its compulsory to have a demat account to invest in stocksNo. It’s not compulsory. But you can hold mutual fund units in a demat account
TaxationShort term gains (less than 1 yr.) are taxed at 15%. Long term gains (more than 1 yr.) above ₹1 lac in a financial year are taxed at 10% without indexation.

Dividend income is taxable in the hands of investors. Taxed as per the applicable slab rates

Gains from equity schemes (equity - at least 65%) get the same tax treatment as those to stocks.

Gains from non-equity schemes are added to income and taxed at the applicable slab rate irrespective of the holding period.

Exception: Schemes with equity exposure between 35% and 65% if held for long term (more than 3 yrs.) shall get indexation benefit @20%

Dividend income is taxable in the hands of investors. Taxed as per the applicable slab rates

Which is better: mutual funds or stocks?

It depends on your personal circumstances, risk appetite, the time you can devote to look-after your portfolio, and of course, also on your research skills. As said earlier, stock give you the direct exposure to equity asset class while mutual funds can help you invest in a range of asset classes. In that sense, stocks Vs mutual funds aren’t competing choices.

What affects the returns of stocks Vs mutual fund?

Factors affecting your stock returns 

  • Market conditions
  • Company selection 
  • Holding period 

Factors affecting your mutual fund returns 

  • Market conditions
  • Investment strategy / philosophy of the scheme
  • Experience of the fund management team
  • Holding period 

As you must have noticed, market conditions affect both stocks and mutual funds. Nonetheless, the level of impact depends on how well or poorly placed your investments are under given market conditions.

Stock Vs mutual funds: Key takeaways:

  • Comparing stocks and mutual funds isn’t exactly a like-to-like comparison. Both stocks and mutual funds can co-exist peacefully in your portfolio. 
  • Your investment objective, risk appetite, time horizon and asset allocation preferences should determine your allocation to stocks and mutual funds.

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