Stocks allow you to invest directly in a company that is listed in the stock market. This is why such investments are also referred to as direct equity. Needless to say, the risk and the volatility associated with direct equity investments are significantly high.
Mutual funds, on the other hand, invest in securities and assets across different companies or sectors, thereby reducing your risk exposure and the volatility involved. These investment vehicles use a collective pool of money from a large number of investors to purchase a predetermined range of assets such as equity, bonds, money market instruments or even gold.
Depending on the kind of assets they invest in, mutual funds can be of different types such as equity funds, debt funds, balanced funds and more. If you are unsure about investing in stocks directly, you can invest in stocks via equity mutual funds too, since these investment vehicles have portfolios consisting of stocks of different listed companies.
Equity mutual funds can be classified according to the market capitalisation of the companies they invest in. Thus, they can be categorised as large-cap funds, mid-cap funds, small-cap funds or multi-cap funds
There are also sectoral and thematic funds that invest in equity stocks of companies in specific sectors or companies that fit certain themes like ethical investing.
You can invest a lump-sum amount in a mutual fund, or you could choose to start a Systematic Investment Plan (SIP). In an SIP, you can invest small sums, as low as ₹500, periodically over the long term. This eliminates the need to time the market and helps you invest in stocks consistently and in a disciplined manner.