Mutual funds and stocks both have risks involved. Some people find mutual funds a risky option while some of them find stocks to be riskier. Generally, it is said that higher the risk, higher will be the return.
If we compare investing through Mutual funds with direct investment in stocks and bonds then investing through mutual funds is always better and here are some reasons why it is so:
- Risk-Return Tradeoff:
A mutual fund involves the pooling of stocks, which reduces the risk of investing. If one company among the many who have invested has a losing strategy, it will be balanced by the other companies. Hence, the risk will be lower. Diversification reduces a lot of the risk element.
- Transparency:
Mutual funds are regulated by the SEBI, which makes the entire process of investment transparent. All the details about investment are disclosed as a measure to protect the interest of the investor. Hence, it can be said to be trustworthy.
- Liquidity:
The liquidity offered by mutual funds is more than the liquidity offered by investing in stocks and bonds. When in need, shares might not provide you liquidity, but mutual funds are highly liquid as they can be redeemed as per your needs.
- Tax benefits:
There are options such as open-ended diversified equity fund, which offers tax exemption under the section 80C of the Income-tax act and also gives an opportunity for your money to increase.
Mutual funds also come with an ease of investment. You can even start investing in a mutual fund with the minimum amount of Rs. 500 per month. There are also various online platforms available that make investing an easy option right from your desk.
Investing in stocks and mutual funds both has its own advantages and disadvantages, and how to make the use of these pros and cons is totally dependent on the investor. With knowledge and experience in the field, an individual can gain the most from both forms of investments.