Long-term investors tend to choose mutual funds in combination with equities as their preferred investment method. People need to know the fundamental differences between mutual funds and equities in order to select an investment that matches their risk tolerance.
Mutual Funds or Equity – Which is a Right Choice for you?
What is Equity?
In financial terms equity serves as a synonym for stocks or shares because it represents ownership stake in a business entity. As an equity share owner you obtain a minimal portion of business assets from the company you invest in. A shareholder in an equity position possesses both ownership rights to company assets and the right to receive profits. Successful company performance will increase share value and generate dividend payments to investors.
- The investment value in your portfolio will decrease when the company releases unsatisfactory financial results.
- With equity investments investors exercise full control to pick their preferred companies and determine purchase and sale timings.
- High potential maximum returns through equity investments come with dramatic fluctuation alongside enhanced exposure to market risks.
What is a Mutual Fund?
The investment tool known as a mutual fund combines money contributions from multiple investors to build multiple asset portfolios composed of stocks, bonds and other securities. These funds operate under professional fund manager direction which makes investment decisions on behalf of the investors who have contributed their funds.
A mutual fund consists of multiple categories which include:
- Give investors the ability to buy equity mutual funds which focus mainly on stock market investments.
- Mutual funds that invest in fixed income securities through bonds come under the classification of debt mutual funds.
- Mutual fund holders have access to Hybrid funds that feature elements of equities and debts.
- Mutual fund investments enable investors to access a diverse range of securities because of which risk reduction occurs through portfolio diversity.
Recommended Read: Different Types of Investment Options
Here is a detailed comparison table between Equity and Mutual Funds:
| Aspect | Equity (Stocks/Shares) | Mutual Funds |
| Definition | Direct investment in the shares of a company. | Pooled investment managed by professionals, invested in various securities. |
| Ownership | Investor becomes a part-owner of the company. | Investors own units of the fund, not direct ownership in underlying companies. |
| Management | Self-managed by the investor (requires research and decision-making). | Professionally managed by a fund manager. |
| Decision Making | Full control over which stocks to buy/sell and when. | No control over individual assets; fund manager takes all decisions. |
| Diversification | Limited unless the investor builds a diversified portfolio themselves. | Built-in diversification across various assets (stocks, bonds, etc.). |
| Risk Level | High – tied to individual company performance; market volatility is significant. | Moderate to high – spread across many securities, which reduces risk. |
| Return Potential | High – can yield substantial returns if the company performs well. | Moderate to high returns depend on fund type and market conditions. |
| Volatility | High – individual stocks can fluctuate significantly. | Generally lower than individual stocks due to diversification. |
| Cost and Fees | Brokerage charges, Securities Transaction Tax (STT), and capital gains tax. | Expense ratio (management fees), entry/exit loads (if applicable). |
| Minimum Investment | Can start with the price of a single share. | Usually requires a minimum amount (e.g., ₹100 to ₹5,000). |
| Liquidity | Highly liquid; stocks can be bought/sold anytime during market hours. | Liquid, but redemption takes 1–2 business days; may have exit loads. |
| Time & Knowledge | Requires significant time, market research, and expertise. | Minimal time and knowledge needed; suited for passive investors. |
| Transparency | Fully transparent; real-time stock prices and company reports available. | Periodic NAV updates and disclosures, but less granular than equities. |
| Taxation (India) | STCG (<1 year): 15%, LTCG (>1 year above ₹1 lakh): 10%. | Equity funds taxed similarly to stocks; debt funds taxed differently. |
| Income (Dividends) | Dividends paid directly by companies (if declared). | Dividends distributed by the fund (if opted in); else reinvested. |
| Regulation | Regulated by SEBI; traded on stock exchanges (e.g., NSE, BSE). | Regulated by SEBI; NAV calculated daily, units issued by AMCs. |
| Ideal For | Experienced, active investors seeking high returns. | Beginners, busy professionals, and risk-averse investors. |
| Example | Buying 10 shares of any company. | Investing in Equity Mutual Fund. |
Advantages and Disadvantages of Equities
Advantages:
- Greater potential for returns.
- Direct ownership of shares.
- High liquidity.
- Immediate control over investments.
Disadvantages:
- Increased risk and volatility.
- Investors must continuously study and monitor equity investments due to their potential risks.
- Portfolio diversity remains limited when owners do not establish broad investment portfolios.
Advantages and Disadvantages of Mutual Funds
Advantages:
- Managed by professionals
- Portfolios filled with diverse assets reduce the overall risk level.
- Ideal for novice investors
- Various types of funds available
Disadvantages:
- Funds charge management fees as a part of their operations.
- Limited control over individual investments
- The returns from mutual fund investments might be lower than what novice investors could achieve from their own stock holdings.
Recommended Read: Things to read from Mutual Funds Factsheet
Who Should Invest in What?
Opt for Equities if:
- Investors who actively manage their portfolio through research benefit from doing so.
- Your ability to take risks without fear is very strong.
- You want total control and seek high potential returns in your investments.
Opt for Mutual Funds if:
- Your financial approach involves investing through passive methods.
- Graduates who understand finances to only a basic level or those new to the market would benefit from this approach.
- Your investment plan requires both portfolio diversification and risk reduction.
Several investors implement a combination approach to find the right balance between risk and return potential. Investors split their money between mutual funds for stability and diversification while choosing individual stocks to reach their goal of greater growth potential.
Conclusion
Investors should consider that mutual funds differ from equities by both management approaches and investment risks together with control mechanisms as well as suitability considerations. Direct company investments that are categorized as equities offer potential high rewards however their management requires experts in addition to specific market knowledge. Mutual funds appeal to passive investors and newcomers because of skilled management of assets alongside diversity and user-friendly characteristics. Investors who accept high-levels of risk together with time for research should choose equities yet those seeking convenience with moderate risk will find mutual funds appealing. The selection between these options must match your financial goals along with your tolerance for risk together with your experience in investing. Investors who combine these two approaches create portfolios that demonstrate better security and diversity.
Learn More About Mutual Funds