How to Choose Between Stocks, Bonds, and Mutual Funds ?

Rohan spent his afternoon drinking chai at his favourite tea shop while staring at his phone. He checked his stock market app, which displayed rapid fluctuations between +5% and -8% before jumping +12%. Rohan was confused about whether to invest his ₹10,000 in stocks, bonds, or mutual funds.

His buddy, Arjun, chimed in. “It depends on how much risk you can handle and what you want to achieve. Let's understand it using some real numbers.”

Investing in Stocks (Big Risks, Big Rewards)

• Rohan decides to invest ₹10,000 in individual stocks.
• Rohan's ₹10,000 stock investment resulted in a 20% increase, which grew his capital to ₹12,000.

₹10,000 × 1.20 = ₹12,000

• As the stock market falls, he will experience a 30% reduction in his investment, resulting in:

₹10,000 × 0.70 = ₹7,000

Stocks can make you rich, but they can also leave you broke.

Investing in Bonds (Low Risk, Steady Growth)

• Government or company bonds provide stable returns of 5% to 7% annually.
• If Rohan puts ₹10,000 into bonds with a 6% yearly return, his money grows to:

₹10,000 × 1.06 = ₹10,600

Bonds offer safety but lower returns than stocks.

Investing in Mutual Funds (Balanced Approach)

• Mutual funds invest in several stocks and bonds, thereby reducing risk.
• Investors obtain 5-7% annual returns when they purchase government or company bonds.
• When Rohan chooses to invest ₹10,000 into bonds at a 6% yearly interest rate, his money will increase to:

₹10,000 × 1.12 = ₹11,200

Mutual funds maintain a balance between reasonable risk exposure and attractive returns, making them an optimal investment option.

Read More - Investment Strategies for Beginners
 

How Should Rohan Decide?

• Stocks are the best investment for Rohan, as they provide a high return and bear some risk uncertainty.
• Bonds are an appropriate investment option when one yearns for steady growth and safety.
• Mutual funds represent an acceptable investment choice for investors who desire a blend between diversification and moderate risk exposure.

A mix, such as the 80-20 rule (80% stocks and mutual funds, 20% bonds), provides growth and stability. Each individual's choice here reflects what he wants from his investments, his risk tolerance, and his timeline.

Before deciding where to put your money, it’s essential to understand these three investment options.

Dalal Street vs. Safe Haven: What’s Your Vibe?

This table offers an easy-to-understand comparison of stocks, bonds, and mutual funds. It aims to help investors choose the right financial products that match their willingness to take risks and their hopes for returns.

Liquidity Comparison: How Fast Can You Sell And Get Cash?

1. Stocks

    

• High Liquidity: Stocks offer high liquidity, which enables immediate sales throughout trading hours.
• Trading volume and market conditions can both influence stock prices.
  
  

2.  Bonds 

• Medium to low liquidity: A bond's liquidity ranges from medium to low and depends on its specific type.
• PPF (Government bonds) and G-Secs (Government Securities) have a specific redemption time (PPF requires 15 years, and G-Secs need days for disposal).
• Corporate bonds offer better liquidity than other instruments, yet liquidity levels differ between bond issuers.
  
  

3.  Mutual Funds

• Medium liquidity: The redemption process for these funds takes 1-3 days based on their fund type.
• Equity funds require a settlement duration of T+2 days, while debt funds need T+1 days.
• Early fund redemption may come with exit loads or taxes.

Bachna Ae Investor: Tax Traps to Avoid!

1. Short-Term Capital Gains (STCG) on Stocks and Mutual Funds: 

These investments become taxable at 20% when you sell assets within 1 year. Stockholders must maintain their investments beyond 1 year to face a 12.5% LTCG tax payment.

• Rohan plans to buy stocks that he will maintain beyond one year to obtain tax benefits through the 12.5% LTCG rate instead of the 20% STCG rate.

2.  Tax on Fixed Deposits and Bonds: 

You must pay tax on your FD and bond interest based on your income bracket, while banks subtract 10% TDS when the interest amount exceeds ₹40,000 (or ₹50,000 for senior citizens)

• Rohan minimises his investments in fixed deposits because all interest earnings are taxable, diminishing his post-tax returns.

3.  Mutual Fund Exit Loads and Taxes: 

Early withdrawals from mutual funds might lead to 1-2% exit load fees and applicable taxes. Equity mutual funds have taxable gains of STCG at 20% and LTCG at 12.5%, whereas debt funds determine their taxation through the holding period criteria

• Rohan chooses equity fund SIPs for mutual fund investments because these approaches reduce taxes and eliminate exit charges.

4.  Tax on Dividends: 

The money you earn from buying stocks or investing in mutual funds goes into your total taxable income that belongs to your tax bracket group.

• Rohan picks growth stocks instead of paying dividends because those dividends could make his total income subject to taxes.
  
  

5.   Premature Withdrawals: 

Early fund withdrawals in PPF, NPS, and EPF will result in tax penalties.

• Rohan uses PPF investments while avoiding early PPF and NPS withdrawals to maintain all available tax benefits.

Also Read –  Stocks, Bonds, and Mutual Funds Simply
 

Jugaad Se Nahi, Strategy Se Karo Portfolio Build!

Investing in a balanced portfolio helps protect your investment from risks while maximising returns.

How Did Rohan Build His Portfolio?

Rohan decided to take moderate risk in his investment plan because he wanted funds that would grow steadily without instability. He distributed ₹10 lakh investment funds with stocks comprising 60%, bonds took 30%, and mutual funds secured the remaining 10%.

Expected Annual Return

Expected Yearly Return

Stocks 

60%

₹6,00,000

12%

₹72,000

Bonds 

30%