Mutual funds and stocks are two very different concepts and people often misconstrue them to be the same. If you are entering the financial market, you have two options to invest. Either you can choose to invest in equities directly through the stock market or you can choose the indirect route of investing in equities through the mutual funds. In this article, you will learn about the difference between shares and mutual funds.
Before learning about mutual funds vs. stocks, let us understand the meaning of each term.
What are Shares/Stocks?
Shares or stocks are issued by the company through IPO (Initial Public Offering) to raise money for expansion and other purposes. These stocks can be bought or sold through demat or trading account. After the listing of shares on the stock exchange through IPO, these shares are available to the public in the secondary market. Depending on your future goals, you can invest in companies by purchasing their stocks for long term. By investing in stocks you get the benefit in the form of price appreciation of stock value when the company performs well.
Let us now learn about what are mutual funds.
What Are Mutual Funds?
Mutual funds are professionally managed investment funds that collect money from different investors and invest them to purchase shares or securities. You can invest in the mutual funds by opting either the lump sum mode or the SIP mode. The returns generated on mutual funds are distributed to you in proportion of mutual fund units held by you.
After understanding the meaning of both the terms, let us understand the difference between mutual fund and share market stocks.
Difference Between Shares And Mutual Funds
• When you invest in mutual funds, the money is pooled by the investment managers and invested in shares or securities of different companies. This provides diversification to your investment. On the other hand, this type of diversification is not possible when you make the investment in shares or stock market directly.
• When you invest in shares directly, it is your responsibility to do an analysis of a company, its price, its future prospects, etc. While on the other hand, when you invest in equities through the mutual funds you get the assistance of professionals who carry out all the necessary research before investing your money in shares.
• When you invest in shares of a company, you become a part of their growth story as you are now its shareholder. You will also get dividends if the company performs well. But, in the case of mutual funds, you purchase their units and therefore, you are in no way connected to the growth or progress of an individual company.
• Investing in shares directly can be a little risky because the whole exposure is towards a single company. In case of mutual funds, your money is invested in various companies which mitigates your risk.
• Investing in equities directly can time consuming as it requires good research of the companies. On the other hand, investing in mutual fund is very easy and simple. All you need to do is find a good mutual fund company and invest your money.
• Mutual funds are maintained by the fund managers. Here you do not have the option of changing the stocks present in the portfolio. On the other hand, when you invest in shares directly, you can easily sell stocks from your portfolio and buy shares of any other company.
• Demat account is the primary requirement to invest in shares. Without a demat account, you cannot purchase or sell shares or securities in the Indian financial market. Whereas in the case of mutual funds, you do not require a demat account and you can invest in them directly.
• Mutual funds can give you higher returns if you stay invested in them for a longer period of time. But in the case of investing in shares, you can trade or even make short term profit with the right strategy of buying, selling or holding any stock.
• Investing or trading in shares involves brokerage charges. Whereas in the case of mutual fund investment, the charges include management fees, entry load, exit load, etc.
The above mentioned are a few of the differences between investing in mutual funds vs. stocks. The next question about mutual funds vs. stocks that might arise in your mind is that among stocks or mutual funds, which is better. In this section of the article, we will resolve this dilemma.
Stocks or Mutual Funds - Which is Better?
Whenever there is a debate on investing in mutual funds vs. stocks, there is always a common question in everyone’s mind that among these two options, which one is the best. Here you need to understand that both these investment options are very different from each other. You must invest in that option which suits your style of investing and risk appetite. If you are fine with taking risks, you can invest in stocks directly. But on the other hand, if you are a conservative investor and do not want to take risks, mutual funds is the right bet for you.
Therefore, selecting any investment option among these two as the best would not be justified because it is the individual’s preference and style of investment that matter the most. If an individual has a clear financial goal in his head than whatever option he selects among the two that would be the best for him.
So by looking at the differences between mutual fund and share market, it would not be wrong to say that both the investment options are good in their own ways. If selecting an investment option among these two is a big dilemma for you, then you can contact IndiaNivesh Ltd. We are the leading financial broking firm in India. Our advisors understand your financial goals and based on that suggest you the right investment option. Our experts and professionals help you in selecting the best mutual funds for investment. In addition, you can open a demat account with us and invest in shares on the basis of our regular research reports.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing
A famous motivational writer had once said, “Like all successful ventures, the foundation of a good and comfortable retirement is planning”. In fact, planning for your golden days should ideally start during the prime itself. Retirement planning is a crucial financial goal. There are multiple products available such as Pension plans, Provident Fund, POMIS (Post Office Monthly Income Scheme), Tax Free Bonds, etc. However, one product that stands out from the crowd is Mutual Funds. What makes Mutual Funds so special?• FlexibilityMutual Funds offer great degree of flexibility to the investors. You can start with a contribution as low as just Rs. 500. There is no upper limit on the amount that can be invested in these schemes. • Potential for higher returnsMutual Funds have the potential of generating higher returns as compared to the traditional instruments such as FDs, PPF, etc. • DiversificationWith Mutual Funds, investors get access to multiple asset categories. You can choose a scheme which is in sync with one’s risk appetite, financial goals, investment horizon. Diversification enables investors to strike the perfect balance between the 2Rs – Risk and Return. In short, there is something for everyone. • Tax efficienciesMutual Funds are relatively more tax-efficient. For instance, ELSS Funds qualify for deduction under Section 80C. Long-term capital gains on equity funds are exempt from tax till Rs. 1 Lakh. • Ease and transparencyThey are extremely investor friendly. The application and transaction process are simple and hassle-free. Moreover, they are transparent as all the required information (past performance, investment details, etc.) are easily available. So, which all Mutual Funds can you invest for your retirement planning?Before forming a Mutual Fund Retirement Plan, you should assess these factors – • How much risk you are comfortable with? • How long will you continue to work? Or How far away are you from retirement?• Retirement corpus that you want to have?Basis these, you can choose from any of these options-1. Equity FundsThese Mutual Funds invest a significant part of the corpus in the stock markets. They have the potential to generate higher returns as compared to other investment avenues such as FDs, debt funds, etc.). Equity funds invest across different market cap stocks basis the scheme’s objective. When should you go for these? Equity Funds by nature are aggressive. They come with a high-risk factor. So, if you are someone who has a good risk appetite you can go for these. Also, equity funds are more suitable for investors who start planning early. So, if you are in 30s, are going to be earning for a long time or basically far away from retirement, equity funds can be a good retirement planning option. 2. ELSS FundsELSS Funds serve a dual purpose. In addition to being a good long-term investment option they also provide tax savings. As per Sec 80C, investments in ELSS (till 1.5 Lakhs) is eligible for tax deductions. Also, the capital gains (long-term) on these funds are exempt from tax till Rs. 1 Lakh. The dividend paid is also tax-free in the investor’s hands. Additionally, compared to other tax saving scheme, they have a shorter lock-in period (3 years). When should you go for these? If you do not want to invest in two different set of products – one for retirement planning and the other for tax planning, ELSS Funds can be a good choice. But remember, that these funds also invest in equity market, so you need to have a decent risk appetite. Also, though they have a short lock-in period of three years. So, you should try to remain invested for at least five to seven years. That will help you to maximise the return potential. 3. Pension FundsMutual Fund Pension plans are debt-oriented hybrid funds. They invest a big chunk of the corpus in government securities, low-risk bonds and other such money market products. The balance is invested in stocks, equities and their derivatives. As they are hybrid funds, they offer best of both the worlds (i.e. equity and debt). The equity portion helps the Mutual Fund Pension plans grow and earn higher returns when the markets are strong or in an upswing. The debt portion helps to bring down the risk quotient of the investments. Mutual Fund Pension plans are taxed as per the rules applicable for non-equity investments. When should you go for these? If you have a low-risk appetite but still want some equity exposure, then you can try out the mutual fund pension funds. 4. Sector FundsSector or Thematic Funds invest in stocks from a specific sector such as banking, utilities, energy, etc. As the market exposure is restricted to only some select sectors, their risk quotient is higher when compared to traditional MFs. When should you go for these? If you have in-depth knowledge about a certain sector/ industry or can constantly monitor policy changes, market fluctuations, economic conditions, then you can go for these. Many sector investors start when the sector funds are beaten down and sell when they recover and grow. 5. Asset Allocation Funds Asset Allocation Funds invest across a wide range of instruments. This includes equity, debt, bonds, government securities, real estate stocks, etc. Some AMCs offer a scope to alter the portfolio composition. This option can be helpful for retirement planning. For instance, you can opt to reduce the equity percentage with age so as to reduce the risk. When should you go for these? You should opt for Asset Allocation Funds when you would like the fund to rebalance your portfolio based on a pre-set asset allocation option without regular intervention. It is actually a hassle-free retirement planning option.Ways to invest in Mutual Fund:There are multiple ways to invest in a Mutual Fund. 1. Lump Sum: Most option people invest in a lump sum by putting in one go. However, there are systematic options of investing in mutual funds as well. They are:2. SIP: Systematic Investment Plans are a boon for investors who want to start small. It offers flexibility and also creates a disciplined attitude to savings. SIPs are also a great way to spread risk across market cycles. Some of the key benefits of SIPs are:• You can start with amount as low as Rs. 500• Investment through SIPs ensures regularity. It removes worries such as timing your investment, looking at market trends, etc.• SIPs have the advantage of compounding. They help to average out the cost and optimise earnings in the long-run.• There are multiple kinds of SIP Plans available. For instance,• Top–Up SIPs which allow investors to increase their contribution amount over time.• Flexible SIPs offer the flexibility to increase or decrease the SIP amount. This ensures that in times of cash crunch or an unexpected windfall, the investor is able to put the money to the best use. 3. STP: Systematic Transfer Plans are like Systematic investment plan but it is a transfer from one fund to another in a systematic manner, instead of investing the entire amount in the target fund in a lump sum. This is a very easy investment option for the retired people where you have a large corpus for investment but do not wish to enter the target fund in one go. Hence you can park your funds in another fund and then systematically transfer the same over time.You can also withdraw your investment systematically and create your own pension fund by using:• SWPSystematic Withdrawal Plans are like quasi pension schemes. They allow individuals to draw a fixed income from their mutual funds in the future/ post retirement. The frequency of withdrawal can be monthly, quarterly, bi-annually or annually basis the individual’s requirement. Conclusion:It is never too early to start planning for your retirement. All you need to choose a scheme or fund that suits your requirement. And if you feel confused about which is the best mutual fund for retirement planning, you can always reach out to market experts such as IndiaNivesh. They offer a wide range of services in areas such as equities, mutual funds, derivatives, IPO, insurance and corporate advisory. Their in-depth market knowledge, experience and technological expertise will ensure that you can have a robust Mutual Fund Retirement Plan in place.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing
Investors always look for opportunities to invest in avenues that can give them good returns in the long run. Along with high returns on investments, they also look for tax saving options. The tax saving investment options that are popular in terms of high return and zero taxation are tax free bonds and tax saving bonds. If you are looking to make tax saving investments, this article will help you in learning about tax free bonds in India and its related information in detail. Let us first understand what tax free bonds in India are. What are Tax Free Bonds? Tax free bonds are issued by the government enterprise. They are like financial products and includes municipal bonds. They are a low-risk investment option and offer a fixed rate of interest. What makes tax free bonds even more attractive is the fact that it makes you eligible to claim tax exemption under section 10 of the Income Tax Act of India, 1961. The money collected by the government from these bonds is invested in housing and infrastructure projects. The maturity period of these bonds is 10 years or more. The next important question that must be arising in your mind is who should be investing in tax free bonds in India. So let us learn about the investors who can invest in tax free bonds. Who Can Invest in Tax Free Bonds? Investors who are looking for a fixed annual income and interest proceeds can invest in the tax free bonds. It is also a good investment avenue for investors who have a lower risk appetite and are looking to invest for long term duration. Individual investors like Hindu Undivided Family (HUF) members and Non-resident Indians (NRIs), who want to diversify their portfolio can also invest in these bonds. Furthermore, SEBI has allowed qualified institutional investors to invest in these bonds. Partnership companies and limited liability groups are also allowed to invest. In the last few years, the regular investors in tax free bonds include regional banks, cooperative banks, trusts and corporate companies. Let us now learn about the features of tax free bonds. Features of Tax Free Bonds Exempt From Tax The main feature of tax free bonds is that they are exempt from tax. The interest earned on these bonds is free from income tax. However, it is advisable that you must declare your interest as income from tax free bonds and not to claim the tax deduction on the investment amount. Moreover, no tax deducted at source (TDS) is applicable on tax free bonds. These bonds are beneficial for individuals who earn higher income and fall under higher tax bracket. Low Risk Since tax free bond schemes are run by the government, the chances of default on interest payment is almost nil. This safeguards your capital and also provides you fixed annual income in the form of interest. Liquidity Tax free bonds are long term tax saving investment option and they have extended lock-in period. This suggests that you cannot liquidate tax free bonds quickly. Therefore, you must be aware of the fact that these tax free bonds cannot act as your emergency fund. Lock-In Period While investing in tax free bonds you must ensure that you will not be needing the money in the short term. This is because tax free bonds have lock-in period of 10 to 20 years. This means, you cannot withdraw your investment before the maturity period. Issuance And Transaction The tax free bonds can be purchased through a demat account or in physical form. They are traded on the stock exchange. Here you must remember that only the interest earned on these bonds is tax free and capital gains made by selling the bonds in the stock market is taxable in nature. Returns The returns on tax free bonds are dependent on your purchase price because these bonds are traded in lower volumes and have limited buyers or sellers. Interest Income The investors in the tax free bonds receive the interest on an annual basis. The rate of interest on these bonds ranges from 5.50% to 6.50%. The rate of interest can fluctuate because they are related to the current rate of government securities. The rate of interest on these bonds is very attractive considering the fact that they are exempt from tax. Let us now have a look at few of the popular and upcoming tax free bonds of 2019. Popular and Upcoming Tax Free Bonds of 2019 Some of the popular and upcoming tax free bonds of 2019 are HUDCO N2 Bonds, REC N7 series, HUDCO N3 Bonds, National Highways Authority Of India, REC N6 Bonds, Indian Railways N7 Series, Indian Renewable Energy Development Agency, Power Finance Corporation, etc. Often people use the term tax free bonds for tax saving bonds and vice versa. But in reality, they both are different from each other. In this section of the article you will learn about how tax free bonds are different from tax saving bonds. Difference Between Tax Free Bonds and Tax Saving Bonds Under tax free bonds, the interest earned is exempt from tax under section 10 of the Income-tax Act. The lock-in period is from 10 to 20 years and you can invest up to Rs. 5 lakhs. On the other hand, under tax saving bonds the initial investment made is exempt from tax under section 80CCF of the Income Tax Act. The tax saving bonds have a buy-back clause and you can withdraw your investments after 5 or 7 years. The tax exemption for tax saving bonds is up to an investment of Rs. 20,000. Let us now learn about investment and redemption of tax free bonds. Investment and Redemption of Tax Free Bonds You can make an investment in the tax free bonds through the demat account or in physical form. It is simple and hassle-free to make an investments in these highly rewarding bonds. However, you can make investment only when the period of subscription is open. Just like investing, redeeming tax free bonds is also a very simple task. You can redeem the bonds after the completion of the tenure. Investing in the tax free bonds and tax saving bonds are highly rewarding as they involve almost no risk. If you are new to the financial market or you are looking to invest in tax free bonds or tax saving bonds, you can take the assistance from IndiaNivesh Ltd. We are the leading broking firm and financial advisors in the market. With our assistance, you can achieve your financial goals and objectives in a desired manner. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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