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

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.”