Mutual Funds vs Equities: Key Differences

As Indian investors increasingly seek avenues to potentially grow their wealth, understanding the difference between mutual funds and equities is crucial—not just for optimising returns but also for mitigating risk and aligning investments with financial goals.

While both mutual funds and equities offer a path to participate in the potential growth of businesses, the way you invest, the risks you shoulder, and the control you have over your portfolio can be significantly different.

Let’s break down these differences so you can make informed choices that suit your personality, investment style and ambitions.

Table of contents

• What are mutual funds and equities
• Equity vs mutual funds: Key differences
• Types of equities and mutual funds
• Pros and cons of equities and mutual funds
• Cost comparison: Equities vs mutual funds
• How to choose a suitable investment for you

What are mutual funds and equities

Mutual funds are collective investment vehicles managed by professionals. When you put money into in a mutual fund, your money is pooled with that of other investors and invested in a diversified mix of assets—such as stocks, bonds, or other securities—according to the fund’s stated objectives and regulatory guidelines. The fund manager decides what (and when) to buy and sell to potentially achieve the scheme’s objectives.

Equities, on the other hand, refer to direct ownership in the shares of a specific company. When you buy equities (stocks), you become a partial owner of that company. Your returns depend on the company’s performance in the stock market. You have the freedom to pick which companies to invest in, when to buy, and when to sell.

Read Also: Mutual Funds vs Stocks: Which is Right for You?

Equity vs mutual funds: Key differences

Diversification

Mutual funds offer inherent diversification, as your money is spread across many companies and sometimes across asset classes. This mitigates the impact on the portfolio if one company or sector performs poorly. With equities, the extent of diversification depends on your stock selection. If your portfolio is concentrated, it exposes you to higher risk if one or more of the companies you have invested in underperforms.

Risk

Equity investments are generally riskier because your returns are tied to the fortunes of specific companies. Market volatility, company performance, and sectoral trends can all impact your investment. Mutual funds, especially those with a mix of asset types, tend to be less volatile due to their diversified nature. With equities, achieving the level of diversification that mutual funds offer can be time-consuming, costly and challenging, especially if you are new to the market.

Management

Mutual funds are managed by professional fund managers who make investment decisions on your behalf. This can be suitable for investors who lack the time or expertise to research and monitor individual stocks. In contrast, equity investments require you to do your own research, pick stocks, and decide when to buy or sell.

Liquidity

Both mutual funds and equities are considered liquid, but with some nuances. Most shares can be bought or sold instantly during market hours at prevailing prices. Mutual fund units can also be purchased or redeemed at any time, but transactions are processed at the day’s applicable Net Asset Value (NAV) and it may take a few business days for the money to reach you (settlement timelines can vary from one mutual fund company to another). Some mutual funds, like Equity-Linked Savings Schemes (ELSS), have lock-in periods. For ELSS, the lock-in period is three years.

Costs

Mutual funds charge management fees and may have exit loads if you redeem units within a certain period. Equities incur brokerage fees and trading costs but generally have no exit loads.

Types of equities and mutual funds

Equities

• Commonly classified by market capitalisation, such as large-cap, mid-cap, small-cap, and micro-cap stocks.
• Can also be grouped by sectors or themes, such as banking, technology, healthcare, or sustainability-related businesses.
• Returns from equities may come from price movements and dividends, and are subject to market risks.

Mutual funds

• Pool money from multiple investors to invest in a diversified portfolio of securities.
• Equity-oriented mutual funds primarily invest in stocks and may be categorised by:
  • Market capitalisation (large-cap, mid-cap, small-cap, multi-cap)
  • Investment style (growth, value, or blend)
  • Strategy (actively managed funds, index funds, sectoral or thematic funds)
• Other mutual fund categories include:
  • Debt funds, which invest mainly in fixed-income securities
  • Hybrid funds, which invest in a mix of equity and debt
  • Solution-oriented funds, designed around specific financial goals or time horizons
• Risk and return characteristics vary across fund types and depend on underlying assets and investment approach.

Pros and cons of equities and mutual funds

Equities

Pros

• Offer direct ownership in individual companies.
• Provide full control over stock selection, timing, and portfolio composition.
• May offer higher return potential if a company performs well over time.
• No ongoing fund management fees.

Cons

• Performance depends heavily on individual company outcomes.
• Higher concentration risk if the portfolio is not well diversified.
• Requires time, research, and ongoing monitoring.
• Price volatility can be high, especially in smaller or less liquid stocks.
• Returns are market-linked and not assured.

Mutual funds

Pros

• Provide diversified exposure across multiple securities.
• Professionally managed according to a defined investment objective.
• Lower effort required for research and portfolio monitoring.
• Available across different categories to suit varying risk profiles and time horizons.

Cons

• Involve costs such as expense ratios and, in some cases, distribution-related charges.
• Investors do not have direct control over individual security selection.
• Fund performance is influenced by the fund manager’s decisions and market conditions.
• Returns are market-linked and not assured.

Cost comparison: Equities vs mutual funds

Cost comparison: Equities vs mutual funds

How to choose a suitable investment for you

Your choice between mutual funds and equities should depend on your investment goals, risk appetite, time commitment, and market knowledge.

• If you are a beginner, mutual funds offer diversification and professional management, which can make them more suitable.
• If you have the time, expertise, and willingness to monitor markets and companies, direct equity investment can offer higher return potential, but with greater risk.
• If you value control and want to actively manage your portfolio, equities provide that autonomy. If you want a more hands-off approach or do not have the time or expertise to track the market, select stocks, monitor your portfolio and make buy or sell decisions, mutual funds can be more suitable.
• For tax benefits, ELSS mutual funds offer deductions under Section 80C of the old regime of the Income Tax Act, 1961, but come with a lock-in period. There is no tax benefit in equities.

Conclusion

Choosing between mutual funds and equities isn’t just about chasing returns—it’s about aligning your investments with your financial goals, risk tolerance, and the time you can dedicate to managing your portfolio. Mutual funds provide a professionally managed, diversified route to market participation, suitable for those who want to mitigate risk and want to let investment professionals handle their portfolio. Equities, meanwhile, offer the potential of higher returns (depending on the quality of stock selection), but demand more attention and carry more risk. Investors may also consider a balanced approach—building a core portfolio with mutual funds for comparatively lower risk and diversification, while using direct equity investments to gain more control and potentially capitalise on specific market opportunities.

Read Also: Stock SIP vs Mutual Fund SIP: Key Differences and Which is Better?

FAQs:

What is the main difference between mutual funds and equities?

The main difference is with regard to ownership. Mutual funds pool money from many investors to invest in a diversified set of assets managed by professionals. Investors do not have direct ownership of the stocks in the portfolio; instead, they own units, which represent their proportional stake in the fund’s portfolio. Equities involve direct investment in the shares of specific companies, giving you partial ownership of those companies. Additionally, mutual funds are professionally managed and diversified, while equities are independently managed by the investor and are not inherently diversified – the investor can choose to diversify by investing in multiple stocks.

How does risk compare between mutual funds and equities?

Mutual funds carry comparatively lower risk due to diversification across multiple securities and assets. Equities carry higher risk since your returns depend on the performance of individual companies, making them more volatile.

What are the management differences between mutual funds and equities?

Mutual funds are managed by experienced fund managers who make all the investment decisions. Equities require you to research, select, and manage your own portfolio, which demands more time, skill, and market knowledge.

Can you explain the liquidity differences between mutual funds and equities?

Equities are highly liquid; you can buy or sell shares instantly during market hours (subject to demand and supply). Mutual funds are also liquid, but redemptions are processed at the applicable NAV and some schemes levy exit loads for redemptions made before a certain period. Some funds, like ELSS, also have lock-in periods.

Which investment is better for long-term growth, mutual funds or equities?

Both can be suitable for long-term growth. Equities have the potential to deliver higher returns if the selected stocks outperform, but they also come with greater risk and require active management. Mutual funds, on the other hand, offer diversification and professional management, which helps mitigate risk. However, this diversification can result in lower potential returns compared to direct equities. Ultimately, the option more suitable for you depends on your risk tolerance, market knowledge, and how involved you want to be in managing your portfolio.

What tax benefits do mutual funds and equity funds offer?

Mutual funds offer tax treatment based on their category. Equity funds are taxed under equity capital gains rules, with short-term and long-term classifications as per prevailing regulations. ELSS, a specific equity fund category, offers tax deductions under Section 80C of the Income Tax Act, 1961 (old regime), subject to lock-in conditions and applicable limits.

How much should I invest in equity funds vs mutual funds?

Equity funds are a category within mutual funds, so allocation depends on financial goals, time horizon, and risk appetite. Equity-oriented mutual funds involve high risk and long-term growth potential. Asset allocation decisions require careful assessment, diversification across fund categories, and alignment with individual financial capacity and investment objectives.

Can I invest in both equity funds and mutual funds simultaneously?

Yes, investors may invest across different mutual fund categories, including equity funds, debt funds, and hybrid funds, within a single portfolio. Such diversification may help balance risk and return potential.

How does portfolio diversification work in mutual funds and equity funds?

Mutual funds achieve diversification by investing across multiple securities within a defined mandate. Equity funds diversify across companies and sectors, reducing dependence on individual stocks. Diversification may help manage volatility but does not eliminate market risk. Portfolio-level diversification also involves combining multiple fund categories with different risk characteristics.

What are the lock-in periods for equity funds and mutual funds?

Most open-ended equity funds and mutual funds do not have mandatory lock-in periods, allowing redemption subject to exit loads. ELSS funds have a statutory lock-in of three years for tax benefits. Closed-ended funds have fixed maturities. Liquidity terms vary by scheme and are disclosed in scheme documents.