There is a lot of difference between investing in the stock market and in equity mutual funds.
- Analysis and risk management: mutual funds do invest in the stock market, but they have a team of analysts, headed by fund managers, who work round the clock managing the portfolio and the money. When we invest in the stock market ourselves, we rely on news, tips and perhaps some research. Most of us don't have the expertise to study and analyse the risk.
- Active management: mutual funds do not require your active day-to-day involvement. You can track your investments as and when you have time, and they are not as volatile as the market. The stock market, on the other hand, requires day-to-day involvement, and it's difficult to find the time to manage your holdings and book profits at the right time.
- Diversification: the key thing to keep in mind while investing is diversification. Investing through mutual funds gives you access to ready-made diversified portfolios. Diversification does not eliminate risk, but it minimises risk while keeping your returns intact.
For example, say the fund you have chosen holds 10 stocks. Even if the share prices of 2 companies go down, there might be 8 companies whose share prices are up. You make up for the loss, and you are actually in profit overall.
When you invest in the stock market directly, the chances of suffering a loss are higher, as you may have invested most of your money in one or two stocks.