Mutual Fund vs Direct Stock Market Investment: Which is better to make more money? EXPLAINED! (2024)

Mutual Fund vs Stock Market Investment: Mutual Funds and markets are equity-oriented investment tools but through the first one, investors get an indirect equity exposure - they give their money to MFs and they in turn, do the investment. Stock market investment is a direct investment option open to investors. According to the tax and investment experts both are market-linked investment options but in the stock market, investors need to choose the stock they want to invest in themselves and then invest directly. Mutual funds have the benefit of fund managers who invest in the stock market on behalf of the investor. They are professionals trained in the business of investing and therefore, are expected to generate greater amounts of wealth and that too safely with minimum risk. On the other hand, risk is far greater for investors who invest directly.

As far as making money is concerned, experts say that in the long-term, say more than 10 years, mutual funds will give at least 12 per cent returns. However, the stock market will give around 16 per cent returns! So, those who have high risk appetite can go for direct stock market investment.

Mutual Fund Returns vs Stock Market Returns

Speaking on the returns an investor can expect from equity mutual funds and direct stock market in long-term perspective, SEBI registered tax and investment expert Jitendra Solanki said, "For long-term time-horizon, say above 10 years, a mutual fund investment would fetch at least 12 per cent returns while in stock market, if stocks are chosen carefully, one can expect one's money to grow at least by 16 per cent per annum in the same period. Stock market investments are expected to give at least 4 per cent more returns than equity mutual funds. However, how much of the ratio of one's portfolio will be allocated to equity mutual funds and stock market is completely dependent upon one's risk appetite."

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Income tax outgo

Where there is income there is income tax too. So, one should not think that the entire returns will be their income. In fact, they will have to give various taxes too.

Highlighting the tax rules involved in mutual funds and stock market another SEBI registered tax and investment Manikaran Singhal said, "In equity mutual fund investment, an investor need not pay STT (Securities Transaction Tax) because they are not investing directly in the stock market. This tax has to be paid by the fund managers of the fund houses. Here, the mutual fund houses charge Expense Ratio to meet this STT expense coming on them."

Singhal said that in both equity mutual funds and stock market, income up to Rs 1 lakh is exempted from income tax and the Long Term Capital Gain becomes applicable in both investments if the time period of investment is one year or above. So, for the long-term investors, there is not much difference in equity mutual fund income and stock market income.

However, for short-term stock market investors, there is a twist. "If a stock market investor is a jobber and believes in intraday or short-term investment, then he or she can shun away LTCG and pay STT plus brokerage only. His or her income from the stock market investment will get added into the net income of the investor and in such case the income tax rule becomes applicable as per the income tax slab," said Solanki.

So, those who have a high risk appetite, they must allocate stock market exposure in their portfolio and save LTCG and pocket around 4 per cent more returns on their money.