Difference Between Stock Market and Mutual Funds

You might have watched the advertisement in which Indian cricketer Shreyas Iyer asks Rohit Sharma that he could check the mutual funds performance just like the player’s performance. Then you see the tagline “Mutual funds sahi hai”.

Difference Between Stock Market and Mutual Funds

Or You might see a newspaper heading about the stock market touches again its all-time high levels. 

Stock Market Index

Both the investment options look lucrative but you may be confused about the difference between the stock market and the mutual fund. 

You might be surprised to know that some mutual funds are directly linked with the stock market performance. 

This article will help you understand the difference between the stock market and mutual funds. How they are they are linked with each other and where they differ.

What is Stock Market 

Stock market is a place where people buy and sell stocks. Just like any market where you buy anything you need.

Now, you may ask what is stock?

Stock is a share in a company’s ownership. When you buy a stock of a company, you become a shareholder in the company for the invested amount.

A company’s business performance results in your profit or loss. That means if the company makes profits in its business, the company shares some profit share with its shareholders. The shared profit is called Dividends. 

The price of a growing company also increases because more people want to invest in a company that is profitable.

On the other hand, if a company makes losses in the business, the price of stock decreases as most of the investors sell their shares to avoid further losses.

You can buy stocks of different companies listed in the stock market from stock exchanges. Stock exchanges are basically platforms where you can do stock trading.

There are primarily two stock exchanges in India – BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). 

Both are regulated by government authority SEBI (Securities and Exchange Board of India). 

What is Mutual Fund 

Mutual fund is an investment type where a professional (Fund Manager) creates different investment plans to help those people who don’t have knowledge of the stock market or they don’t want to invest directly in stocks.

The fund manager decides where to invest people’s pooled money. He also diversifies investor’s money in stocks, corporate bonds, and government securities.

Diversifying money reduces the risk of loss due to stock market volatility.

The company that offers the service is called an Asset Management Company (AMC) or a Mutual Fund House. You pay some fee to the AMC for its services called expense ratio.

Mutual funds are basically of 3 types – 

Types of Mutual Funds

Equity funds are those where more than 65% of your money is invested in stocks. Equity funds are considered “High Risk – High Return” funds because they are highly affected by the stock market’s volatility. 

Equity funds are ideal for long term investment.

Debt Funds are low-risk mutual funds that come under the “Low Risk – Low Returns” profile. Your 65% money is invested in fixed return assets like government bonds, corporate bonds, treasury bills, and other similar instruments. 

Debt funds are ideal for short-term investment. Debt funds are the best alternative to fixed deposits as they give you better returns than FDs.

Hybrid Fund or Balanced Fund is a combination of equity and debt funds. Hybrid mutual funds invest in equity around 50% to 70% and rest in the debt-based securities.

If you want better returns than debt funds but can’t take risks similar to equity funds, then hybrid mutual funds are the best choice for you.

Now you understand the fundamentals of the stock market and mutual funds, its time to check the difference between mutual funds and the stocks market

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Difference Between Stock Market and Mutual Funds

#1. Nature of Business

Stock market is a platform where you can invest directly in stocks. 

A mutual fund is a platform where you invest through a fund manager. The fund manager diversifies your money in several stocks and debt instruments.

You can also buy stocks and sell on the same day to earn a profit. That’s called stock trading. You can’t do trading in mutual funds.

#2. Direct Investment vs Diversification

Since you buy a direct stock, the risk is directly related to the price fluctuation of that stock.

In mutual funds the risk is reduced by diversifying the investment portfolio. 

For example, suppose a mutual fund is investing in 10 stocks. If the price of one stock falls, the overall value of the mutual fund would not be affected much as the 9 other stocks will balance the price fluctuation.

That’s the beauty of diversification.

#3. Freedom vs Free Mind

Stocks give you freedom to buy your favorite company’s stock. 

You can’t do that in mutual funds because mutual funds are pre-designed by fund managers. You don’t have the option to customize a mutual fund to invest in your favorite stock.

Mutual funds give you a free mind because you don’t have to do the research work like analyzing company fundamentals. Your fund manager will look after that.

#4. Commission

You invest through a broker in the stock market. You need to pay a brokerage commission to the broker for his services.  The brokerage could be like 0.03% per order or Rs. 20 per order.

In mutual funds, you have to pay different expenses such as expense ratio, exit load and commission to AMC.

  • Expense ratio – the annual percentage amount that AMC charges from investors. Lower the expense ratio means you have to pay fewer charges. The expense ratio could be like 0.1%
  • Exit load – Some mutual funds have a lock-in period. You pay an exit load if you withdraw within a lock-in period.
  • Commission – If you invest in regular mutual funds through a broker you have to pay some commission. You can also invest directly via AMC to avoid a commission.

#5. Technical Understanding

In the stock market, you need the knowledge of analyzing a company’s fundamentals, management changes, and similar stuff to decide which company you should invest in.

In mutual funds, since you are not investing yourself, you don’t require any technical knowledge.

However, you simply understand the investment sectors in which a mutual fund is investing, then you can decide based on your understanding.

#6. Account Types

In stocks, you need two accounts – Trading account and Demat account.

A trading account is required to buy or sell the shares, and a Demat account is required to store your purchased stocks for the long term.

You don’t require both accounts for mutual funds. You can directly invest in mutual funds with any AMC. Mutual funds are kept in the account opened with the AMC.

If you are investing through a broker, they will open a Demat account to hold the mutual funds. The only benefit is you can keep track of all your investments in one place. 

#7. Beginners Vs Expert

If you are a newcomer,  mutual funds are an ideal place to start your investment journey. 

You can learn about the stock market in the meanwhile and test your learning with small investments in stocks.

Once you become an expert you can move to stock investment.

#8. Tax Payments

Either you invest in stocks or mutual funds,the profits attract taxes. There are 2 types of taxes –

#1. Long Term Capital Gains

If you hold your stocks or equity mutual funds for more than 1 year and your gain is above Rs.  1 lakh, then you have to pay 10% tax. 

If your gain is below Rs. 1 lakh, then no tax is required.

Lock-in period for debt funds is 3 years, if you sell after 3 years, you attract long term capital gains at a flat rate of 20% after indexation. 

#2. Short Term Capital Gains

If you sell your stocks or equity mutual funds within 1 year, you attract short term capital gains that is 15% on equity stocks. 

If you sell your debt funds within 3 years, you attract tax under short term capital gains that is 15%.

#9. Tax Savings

You can invest in ELSS mutual funds to save your taxes. You can get a tax rebate of up to Rs. 1.50 lakh per year under section 80 C of the Income Tax Act of India.

Whereas you don’t have such provisions in the stocks.

#10. Investment Timings

Stock markets open at 9.15 am and close at 3.30 pm. Stock market is open 5 days a week from Monday to Friday. 

So you can invest in stocks only when the markets are open.

But you can invest in mutual funds at any time. Mutual funds investment is available 24 hours. 

You’ll get the mutual fund price of the same day if you buy equity funds, but you get the price of the previous day if you buy liquid funds.

#11. Stock Price vs NAV

In stocks there’s stock price, similarly in mutual funds there’s NAV that represents price per mutual fund unit.

Final Words

You have understood the difference between stock market and mutual funds, you can now take better decisions.

You can start your investment journey with mutual funds and keep learning about the stock market and test with small amounts.

Gradually, you can move to direct stock investment or you can invest in both as per your investment goals.

FAQs Related to Stock Market vs Mutual Funds

#1. Can I invest 100 RS in the share market?

Yes. You can invest any amount in the share market depending upon the price of the share.

In mutual funds, you can start with even Rs. 100 as some mutual funds allow you to invest as low as Rs. 100.

#2. Is it safe to invest in the stock market right now?

Yes. Investing in the stock market is always safe if you are a long term investor and understand the technicalities of the stock market.

Experienced investors invest when the market falls, which gives them an edge over others because when the market rises, they will earn more profit as compared to someone who is buying stocks when the market is already going high.

#3. What are the stock market open and close time?

Stock markets (BSE and NSE) open at 9.15 am and close at 3.30 pm. Stock market is open 5 days a week from Monday to Friday. 

Stock markets are closed on weekends (Saturday – Sunday) and on public holidays.

#4. Stock market or mutual fund which is best?

Stock market or mutual fund both are best depending upon the investor. If you are a beginner, you should invest in mutual funds.

If you have better understanding of stock market behavior, then you can start investing in stocks.

#5. Are mutual funds safe?

Depending on the type of mutual fund the risk of money loss varies. If you are investing in equity mutual funds, then the risk is high and you can say mutual funds are not so safe.

But if you are investing in debt funds, then you can say debt funds are safe as more than 65% of your money is invested in safer instruments like government securities or treasury bills. 

However, there’s also a chance of slight risk as you have 35% money invested in the stocks.

#6. Are mutual funds good investments?

Yes mutual funds are good investment types for long term wealth creation as well as tax savings because you can yield better returns as compared to traditional investments methods like FDs or insurance policies and you can overcome the market volatility risk if you invest for long term.

Because in long term investment, if a market is crashed for some days or some weeks, it will still recover over the period of time and you won’t make a loss in the long run.

#7. Are mutual funds traded on an exchange?

No. Mutual funds are not traded on exchanges. Stocks are traded on stock exchanges.

#8. Are mutual funds stored in demat account?

Yes. if you are investing in mutual funds through a broker like Zerodha or Upstox. They store your mutual funds in the demat account. 

But that’s not mandatory, you can even invest in mutual funds directly through AMC lke HDFC mutual fund without the need of a demat account. Your mutual funds will be stored in your AMC account that you have created at the time of investment.

About Rajan Dhawan

Rajan has covered personal finance and investing for over 5 years. Previously, he was in the IT field for 8 years after completing his MCA but his deep interest in personal finance led him to become an investing expert. He is passionate about investing, stocks, startups, and cryptos.

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