Stocks or Mutual Funds : Which is better ?

by khalid on 05/07/2010 · 0 comments

Mutual funds or stocks? Every new investor in Stock Market has come acrosss this question. There is no correct answer for this as the answer would depend on the investors priorities. Majority of investors thinks that Mutual Funds are better than Stocks. It is correct too up to some extent. But as for as risk is concern there is no difference between Stocks and Mutual Funds. On the event of Stock Market crash, bothe will go down.

Stocks are shares of ownership in a company. You can buy shares through a brokerage at the price per share. stocks are more volatile and risk and return go hand-in-hand. Stocks are considered investments for the long run.

A mutual fund is a huge collected amount of money from a large group of investors by a mutual fund house. Mutual fund manager uses to buy lots of different stocks, bonds, and/or other assets that meet the particular mutual fund’s investment criteria.

Mutual funds carry a low amount of risk. If you are a low risk taker, mutual funds may be for you. If you can’t stand watching your money going up and down every day by large amounts, then invest in mutual funds. Why are mutual funds such safe and low risk investments ? Because they diversify. They give your money a little taste of everything. The fund will invest your money in a number of different stocks in different industries. That way, a single company’s depreciation can balance out with another company’s appreciation.

Mutual funds have an edge over stocks because they are less volatile and as they have shares of lot of companies so do not have sharp movement on either side (Up or Down) like movement in any individual stock or sector. Mutual Fund have a diversified portfolio and as you are not investing in any particular stock or company. Sharp movement of a volatile stock is counter balanced by other stock giving you low beta movement of your investments. Mutual funds investment also gives you tax benefit as a capital gain tax if invested for one year. ELSS option is also there for saving tax.

However, mutual funds do have their disadvantages. The biggest disadvantage to know about a mutual fund is that most mutual funds underperform the stock market’s average (represented by the S&P 500 Index) every year. 90 percent of mutual funds, in the last decade, have underperformed the market. Think about it, all those “expert” money managers can’t even beat the market.

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