Stocks and mutual funds are often compared in terms of their risk profiles and ability to earn returns. However, the two financial instruments are very different and should not be seen as interchangeable. If you have been wondering whether to invest your hard-earned savings directly in the stock market or mutual funds, here are some key distinctions that might help you make the decision:

	Mutual Funds	Stocks
Meaning	Mutual funds accumulate money from a group of investors and further invest the sum in various securities like stocks or bonds.	Stocks represent partial ownership in a company. Also known as equities, stocks allow you to “share” in the profits as well as losses and entitle you to dividends.
Level of Knowledge	You don’t need to have excessive knowledge of the market to invest in mutual funds. Since they are typically managed by professionals, you become a passive participant relying on their knowledge and expertise. However, understanding the market and gaining experience with its fluctuations can help you invest in the right funds and track their performance in a more informed manner.	Direct equity investment would involve you playing an active role in making the decisions. Therefore, you need to display an interest in learning about the market, understanding how trades work, keeping yourself updated about developments in finance, and so on. You can’t just invest your money once and forget about it for years — you have to monitor the stocks’ performance and switch things up when it feels like the market is changing.
Risk Profiles	Mutual funds have a lower risk profile than stocks. There are different types of mutual funds that invest in different securities, so you can choose the fund that aligns with your risk appetite. You can also diversify your portfolio by investing in multiple funds at a time. Balanced or hybrid funds allow you to invest in debt and equity together to reduce risk and increase returns.	Stocks have the capability of providing the highest returns of any financial product, but they also have the potential to crash and result in a loss. That makes them a lot more extreme than mutual funds. You must depend on your judgment and make sure you follow safety protocols such as stop-loss orders that can minimize losses. Therefore, the risk profile is higher than mutual funds.
Taxation	You will only be taxed on redemption of your mutual fund units according to the type and classification (equity/non-equity, short-term/long-term, etc.). You may be eligible for deductions in tax-saving mutual funds like ELSS.	You will have to pay the capital gains tax for every transaction made or dividend earned. There are no tax benefits on direct equity returns.

Conclusion

While neither of them is right or wrong when it comes to investing your money, one may be more suited to your financial situation, future goals, and risk profile than the other. Consider the differences with care, and if you find both options appealing, you can choose to invest in equity-linked mutual funds like ELSS, which give you the best of both worlds. To compare and track the performance of funds you are interested in, download the Tata Capital Moneyfy App and start investing instantly.