Mutual funds vs stocks: Which may be a safer bet for new investors?

The allure of quick gains draws many first-time investors to direct equity, but data and investor behaviour suggest caution. Are stocks truly safe for beginners — or do mutual funds offer a better starting point?

For first-time investors, building trust, habits, and financial understanding is more important than chasing high returns. Mutual funds offer a structured and less intimidating way to get started on that journey. Hence, experts seem to agree that for new investors, mutual funds generally offer a more suitable entry point compared to direct equity investments, especially when considering risk, return consistency, and behavioural factors. 

“Most retail investors tend to exit early due to volatility or short-term losses, underscoring the behavioural challenges of managing direct stocks,” said Nikhil Aggarwal, founder & group CEO, Grip Invest.

According to data from the Securities and Exchange Board of India (Sebi) dated September 2024, a vast majority of individual traders in direct equities, particularly in the futures and options (F&O) segment, incurred losses. Furthermore, behavioural studies have shown that fewer than 10% of retail investors hold stocks for more than two years.

The tendency to panic and sell prematurely is one of the many reasons mutual funds remain a more beginner-friendly option. Ishkaran Chhabra, founding partner & chief investment counsellor at Centricity WealthTech, explained, “For beginners, mutual funds are often a smarter entry point than direct stocks. They offer professional management, diversification, and lower risk—ideal for someone still understanding the market.”

Chhabra added, “Direct stock investment may be more rewarding but requires time, knowledge, and a higher risk appetite. Most new investors aren’t ready to handle that volatility right away.”

Why mutual funds are often better for new investors

1. Professional management

Mutual funds are managed by experienced professionals who make informed decisions based on extensive research and data. This relieves new investors from having to constantly monitor markets and analyse companies.

“This becomes especially useful for new investors who may not have the time, experience, or skill to analyse and manage individual stocks,” said Aggarwal. “In 2025, mutual funds are increasingly using AI and data-driven models to improve decision-making and enhance portfolio resilience,” he added.

2. Diversification

By pooling money from many investors, mutual funds are able to invest in a wide array of asset classes—equities, debt, and even commodities like gold. This diversification reduces the impact of a poor-performing stock or sector, which is crucial for inexperienced investors.

3. Affordability and convenience

Mutual funds allow investors to start with as little as ₹100, making them highly accessible. Building a diversified stock portfolio directly would require significantly more capital and effort.

4. Liquidity

Most mutual funds, especially open-ended schemes, offer high liquidity. Investors can redeem their units and access their funds within a few days, which provides flexibility in case of emergencies.

5. Regulation and transparency

Mutual funds in India are regulated by Sebi, which ensures transparency, investor protection, and adherence to strict operational norms. “Sebi’s regulatory oversight adds a layer of safety for new investors,” said Aggarwal.

6. Tax benefits

Certain mutual fund categories like Equity Linked Savings Schemes (ELSS) offer tax deductions under Section 80C of the Income Tax Act, making them a tax-efficient investment option.

While direct equity can yield higher returns, it demands time, patience, and a higher risk tolerance, traits that most beginners may not yet possess. Instead, mutual funds can serve as a practical gateway into the world of investing, helping build confidence and habits over time.

“As financial goals change, one can increasingly venture into direct equity. When it comes to wealth creation, mutual funds are the most balanced and convenient option as they help to develop a disciplined, goal-oriented investment habit,” said Chhabra.