Har Ghadi Badal Rahi Hai Roop Zindagi,

Chhav Hai Kabhi Hai Dhoop Zindagi,

Life is changing every moment.

Life is shade sometimes, but it’s sunshine sometimes.

Har Pal Yahan Jee Bhar Jiyo,

Jo Hai Sama, Kal Ho Na Ho,

Every moment, Live life to the furthest.

You will not have the same time tomorrow as you have today.

This song from Kal Ho Na Ho more or less summarizes the difference between Stocks and Mutual Funds.

Stocks vs Mutual Funds?

Your decision to invest in Stocks or Mutual Funds should depend on your capital flow and time horizon. 

This means you should decide if you want to invest in stocks or mutual funds based on what you want to do with the returns and when you want the returns. 

Do you want the money to buy an iPhone or a House? How much buffer you can wait to retrieve your money if the market turns bearish? Kal Ho Na Ho!

Questions You Must Ask:

1. Why do I want to invest?

2. How long can I invest?

3. How much will I be able to invest?

4. When do I want the money?

5. What do I want the money for?

When you invest in Stocks:

You should watch out for the company’s

1. Financials 

2. Management 

3. Growth plan 

4. Investment 

5. Sales growth  

When you invest in Mutual Funds:

You should watch out,

1. How many Stocks are in the Portfolio?

2. Is your fund capital-protecting? – Based on your risk.

3. % of mid-caps, small-caps, and large-caps

4. Ratings – 5* 

5. Stocks with AAA ratings.

Diversified Portfolio:

Mutual Funds are better than stocks in that Mutual Funds invest in a far more diversified portfolio than stocks.

An Ideal Diversified Portfolio which comprises individual stocks contain,

15 to 20 Stocks.

But an Ideal Mutual Fund Portfolio comprises of 

35 to 60 Stocks.

Stocks are Better?

Stocks are better than Mutual Funds in that Mutual Funds have a high expense ratio of 2 to 2.5%.

This means you need more money in your hand to invest in Mutual Funds than stocks.

In Stocks, you can either invest long-term on a particular stock or buy when the stock is low and sell, and exit when the stock is alpha – when the stock performs well.

In Mutual Funds too, funds rise by 85 or 150 times if the investor stays invested for decades – i.e., more than 24 to 25 years.

The Cashflow Solution:

If you are investing in Mutual Funds, you should decide how you want to invest based on your cash flow. This means how much cash you have in hand, or how much cash you want to regularly invest.

Simply put,

This means,

1. Are you getting a salary every month which you want to invest?

2. Or, Do you want to invest a lump sum that you have after selling your property or a sudden bug bounty?

The Key Question:

What qualifies as Lump Sum?

If you can invest 5000 Rs, every month,

Lump Sum = Rs. 60,000 to Rs.1.2 Lakhs

If you do not have 12 to 24 times the amount which you can afford every month, that does not qualify as a lump sum, since you may have needs to put that amount to some other use.

Know more about Lump Sum in Mutual Funds!

Stagger in Mutual Funds:

When you invest in stocks, you invest in one go after choosing how much you want to invest.

But when you invest in mutual funds, it’s okay to stagger.

This means you can start with 10%.

Then you can invest 20% after 6 months and 50% after a year or two.

When to Stagger?

Ideally, the market declines by 10 to 20% every 6 months.

This is when you should buy stocks or invest that next 20% or 50% in Mutual Funds.

How long should you Hold?

Just like in stocks, the longer you hold, the better returns you reap in mutual funds.

Statistically speaking,

In the worst case, Mutual Funds returned -2% in 5 years.

This -2% was offset and returns were always positive after 10 years. In fact, after 10 years, the fund grew by 5 to 20%.

Ideally, most experts suggest that the best time period for holding Mutual Funds is 6 to 7 years, especially if it is an equity mutual fund.

Always have a buffer period of 1 or 2 years after your 6 to 7 years time period, just in case the market is bearish at the time.

Some categories like long-caps are assuredly known not to give negative returns after 7 years.

This is where the Goal comes in when deciding what mutual fund to pick.

Goals & Mutual Funds:

Debt Funds:

If you want your money in one or two years for buying an iPhone, or if you want to reduce volatility, debt funds are the way to go.

Debt mutual funds mainly invest in debt securities, including corporate and government debt securities.

On a lighter note, mutual funds apart, PPF is a debt fund.

Equity Funds:

When you deposit money in Equity Funds, always invest money in liquid funds which you can retrieve if the market is down.

Equity mutual funds invest in shares, bonds, and other securities and are classified as equity-oriented mutual funds.

If you are investing for say, five years an aggressive hybrid fund with both debt funds and equity funds should be your choice.

SIP:

SIP is a method of investing in mutual funds. A systematic investment plan is one which automates your monthly investments and helps you invest in a mutual fund with a certain goal at regular intervals just like you invest in RD and FD.

Read more about SIP on StockPe!

To calculate how much returns you will get through SIP, use the StockPe SIP Calculator!!

ELSS:

ELSS stands for Equity-Linked Savings Scheme. It is a type of mutual fund in India that primarily invests in equity shares of companies across different market capitalization segments. ELSS is a tax-saving mutual fund scheme under Section 80C of the Indian Income Tax Act, which allows investors to claim deductions on their taxable income up to a maximum limit of Rs. 1.5 lakhs per annum.

The lock-in period for ELSS funds is three years, which means investors cannot withdraw their investment before the completion of three years from the date of investment. ELSS funds have the potential to provide relatively higher returns than other tax-saving investment options such as Public Provident Fund (PPF) and National Savings Certificate (NSC).

Prime Rated Funds:

1. Will the Stocks Deliver?

2. Diversify across Sectors

3. Performance over short-term and long(not very long) term

4. Equity? Large Caps – 70% Small/Mid Caps – 30 to 35%. Debt? High Quality.

5. Value-based Equity Funds in line with the Stock Market.

Prime-rate funds are closed-end mutual funds that work to provide yields that match the prime rate.

Closed-End Funds:

A closed-end fund raises capital for its initial investments by issuing a fixed number of shares through a single initial public offering (IPO). 

Unlike open-ended funds, such as mutual funds and exchange-traded funds (ETFs), closed-end funds cannot issue new shares or accept new investment capital after the IPO. The shares of closed-end funds are bought and sold on a stock exchange.

On the other hand, open-ended funds accept a constant flow of new investment capital and can issue new shares and buy back their own shares as per the investor’s demand. Most mutual funds and exchange-traded funds (ETFs) are open-ended in nature.

Think of Closed-End Funds as the IPO of the MF Market.

Liquid Funds:

Know more about Liquid Mutual Funds!

You should always deposit a certain part of your mutual fund portfolio in liquid funds so that volatility does not affect your fund.

Liquid fund returns are less volatile given the shorter maturity of the portfolio. If you have read our, ‘How can you start Investing in College?’, Blog, you would know that this is the fund you must invest in for one year to buy that iPhone.

Tax:

In India, AMFI is the nodal association for mutual funds in India. Mutual Funds are better than stocks when tax is considered. In MF, you get to pay only long-term capital gains tax on your returns which is less than short-term capital gains tax which you pay for stocks if you sell your stocks before 1 year.

Mutual Fund & Relationships:

In a healthy relationship, prioritize happiness over history. The same goes for mutual funds. Staying committed goes a long way.

Make your SIP your friend and stay invested through highs and lows!

Whether you invest in stocks or mutual funds, nurture your investments and water them regularly.

Advantages of Mutual Funds:

Diversification: 

One of the biggest advantages of investing in mutual funds is diversification. By investing in a mutual fund, you can access a wide range of asset classes like equities, debt, commodities, and real estate. This diversification helps to spread the risk across various asset classes, reducing the overall risk of the investment.

Professional Management: 

Mutual funds are managed by experienced fund managers who have a deep understanding of the market and its various complexities. These managers conduct extensive research and analysis to select the best investment options for the mutual fund scheme.

Access to Different Types of Mutual Funds: 

There are various types of mutual funds available in the market, such as equity funds, debt funds, hybrid funds, and sectoral funds. Each type of fund is designed to meet different investment objectives and goals. This provides investors with a wide range of investment options to choose from.

Flexibility: 

Mutual funds are highly flexible investments that allow investors to invest small or large amounts of money at their convenience. They also provide the option to switch from one mutual fund scheme to another if the investment goals change.

Low Investment Requirements: 

Mutual funds in India have a low investment requirement, making them accessible to even small investors. The minimum investment amount can be as low as Rs. 500, making it easy for anyone to start investing.

Easy to Monitor:

Mutual funds provide regular updates on their performance and holdings, making it easy for investors to monitor their investments and make informed investment decisions.

Tax Benefits: 

Mutual funds offer tax benefits under Section 80C of the Income Tax Act, of 1961. Investors can claim a deduction of up to Rs. 1.5 lakh by investing in ELSS (Equity-Linked Saving Scheme) mutual funds, which have a lock-in period of three years.

Lower Expense Ratio: 

Mutual funds have lower expense ratios compared to other investment options such as direct equity investments. The expense ratio is the fee charged by the fund house for managing the mutual fund scheme, and it can range from 0.5% to 2.5% of the total assets managed.

Track Record: 

Mutual funds have a long track record of providing good returns over the long term. This gives investors confidence in their investment decisions and helps them achieve their financial goals.

Disadvantages of Mutual Funds:

Lock-in Period: 

Some mutual fund schemes have a lock-in period, which means that investors cannot withdraw their money before a certain period of time. This reduces the liquidity of the investment and may not be suitable for investors who need access to their funds in the short term.

Investment Objectives: 

Mutual funds are designed to meet specific investment objectives, and investors need to choose a mutual fund that aligns with their investment goals. Choosing the wrong mutual fund can result in lower returns and may not meet the investor’s financial goals.

Fund Manager Risk: 

Mutual funds are managed by fund managers who may not always make the right investment decisions. If the fund manager underperforms, it can result in lower returns for the investor.

Market Risks: 

Mutual funds are subject to market risks and can be affected by fluctuations in the market. This can result in lower returns or even loss of capital.

Expense Ratios: 

While mutual funds typically have lower expense ratios than other investments, the fees can still add up over time and reduce the overall returns.

Lack of Control: 

Investors in mutual funds have limited control over the investments made by the fund manager. They cannot decide which individual securities the fund will invest in, which can be a disadvantage for some investors.

Who is an Asset Manager?

An asset manager of a mutual fund is a professional or a team of professionals responsible for managing the fund’s assets and making investment decisions on behalf of its shareholders. Their primary role is to maximize the returns of the fund’s investments while minimizing risk to the extent possible.

What do they do?

Asset managers of mutual funds typically have years of experience in the financial industry and are experts in their field. They analyze market trends and economic indicators to determine which securities to buy, hold, or sell within the fund’s portfolio. They also closely monitor the performance of the fund and make adjustments as needed to maintain its overall investment strategy.

Risk & Diversification:

One of the key responsibilities of an asset manager is to diversify the fund’s holdings to minimize risk. This means investing in a variety of asset classes, such as stocks, bonds, and cash, and spreading investments across different sectors and geographies. By diversifying, the asset manager can reduce the impact of any single investment on the overall performance of the fund.

Communicators:

Asset managers of mutual funds are also responsible for ensuring that the fund complies with all regulatory requirements and that the fund’s investments align with its stated investment objectives. They communicate regularly with the fund’s board of directors and its shareholders to provide updates on the fund’s performance and investment strategy.

In summary, the asset manager of a mutual fund is a critical role that involves managing the fund’s assets, making investment decisions, diversifying holdings, and ensuring compliance with regulatory requirements. Their expertise is essential to the success of the fund and its shareholders.

What are Asset Classes in Mutual Funds?

Asset classes in mutual funds refer to different categories of financial assets in which a mutual fund invests. There are various asset classes that mutual funds can invest in, such as stocks, bonds, cash, real estate, and commodities. Each asset class has unique characteristics and risks, and they can be further classified into sub-asset classes based on different criteria such as company size, geography, and sector.

Equity:

Stocks are one of the most common asset classes in mutual funds, and they represent ownership in a company. Stocks are generally classified into large-cap, mid-cap, and small-cap based on the size of the company. Large-cap stocks tend to be more stable and mature companies, while small-cap stocks tend to be more volatile but with higher growth potential.

Bonds:

Bonds are another common asset class in mutual funds, representing debt issued by corporations or governments. The Bonds can be classified based on their maturity, credit quality, and issuer. Long-term bonds tend to offer higher yields but with greater risk, while short-term bonds offer lower yields but with lower risk.

Cash:

Cash and cash equivalents are assets that can be easily converted into cash, such as money market instruments, short-term debt securities, and bank deposits. The Cash and cash equivalents provide stability to a mutual fund’s portfolio and can be used to meet short-term liquidity needs.

REIT:

Real estate and commodities are alternative asset classes that mutual funds can invest in. Real estate can include direct investments in properties, as well as investment trusts and real estate mutual funds. Commodities can include physical assets such as gold, silver, and oil, as well as futures contracts.

By investing in a mix of different asset classes, mutual funds can diversify their portfolios and reduce risk. The mix of asset classes that a mutual fund invests in is known as its asset allocation strategy and is designed to meet the fund’s investment objectives and risk tolerance. Investors can choose mutual funds based on their asset class preferences and investment goals.

As we discussed, we conclude that the choice to invest in Stocks and Mutual Funds is based on your capital flows, time horizons, and purpose.