Stock Market 101 — Lesson 2

Assets 101: Stocks vs Bonds vs ETFs vs Mutual Funds

Hook

“Where should I put my first ₹/$?” Most beginners hear about stocks, funds, and ETFs but don’t know the differences. This lesson breaks it down in plain English so you can choose a simple, sensible starting mix.

Key takeaways

• Stocks = ownership, higher potential return, higher ups/downs.
• Bonds = lending to governments/companies, steadier, lower return.
• ETFs = baskets you trade like a stock (low fees, intraday liquidity).
• Mutual funds = baskets priced once per day (good for automated investing).
• Fees, liquidity, and risk match matter more than fancy names.

1) What is an “asset class”?

An asset class is a big bucket of similar investments—like stocks (ownership in companies) or bonds (IOUs you lend to governments/companies). Knowing the bucket tells you the typical risk/return and how it behaves in different markets. Your portfolio is just a mix of buckets.

Plain analogy: If your money is a team, asset classes are the player types—strikers (stocks, aggressive), defenders (bonds, steady), and support roles (cash, gold, etc.). Good teams balance roles.

2) Stocks (Equities)

What they are: Tiny slices of a company.
How you make/lose money: Price changes + possible dividends.
Risk/return: Historically higher return over long periods, but volatile day to day.
When good: Long time horizon, can handle ups/downs, want growth.
Costs: Trading fees + bid–ask spread; if you use a stock fund, the fund charges a small expense ratio.
Liquidity: Generally high for large, popular companies.

Example: Owning a piece of a retailer means you benefit if it expands profitably; you suffer if it struggles.

3) Bonds (Fixed Income)

What they are: Loans you give to a government or company; you receive interest (coupon) and principal back at maturity (if all goes well).
Risk/return: Lower average return than stocks; steadier. Sensitive to interest rates (when rates rise, existing bond prices usually fall).
Types: Government (usually safer, lower yield), corporate (higher yield, more risk), short vs long duration (shorter = less rate sensitivity).
When good: Balancing risk in a portfolio, stabilizing returns.
Costs: If you buy via a bond fund/ETF, you pay an expense ratio (often low).
Liquidity: High in broad bond funds; individual bonds vary.

Example: A 3-year government bond fund may move far less than a small-cap stock fund—useful to steady a beginner’s portfolio.

4) ETFs (Exchange-Traded Funds)

What they are: Baskets (often index-tracking) that you trade like a stock during market hours.
Why beginners like them:

• Low cost: Many have small expense ratios.
• Diversification: One buy gives you dozens/hundreds of holdings.
• Intraday flexibility: Can place limit or stop orders, see live prices.
  Trade-offs: You pay the bid–ask spread, and thin ETFs can have wider spreads.
  Use cases: Broad market exposure (e.g., a total-market or large-cap index), sector slices, or bond exposure via a bond ETF.

5) Mutual Funds

What they are: Baskets priced at day’s end (NAV). You don’t trade them intraday; you place an order and get filled at that day’s closing price.
Why beginners like them:

• Good for automatic monthly investing (SIP/auto-invest).
• Some are actively managed (a team picks holdings); others are index funds (rules-based).
  Trade-offs: No intraday trading. Some active funds have higher fees and may underperform their benchmarks after fees.
  Use cases: Hands-off investing; retirement or long-term goals where you won’t monitor intraday.

6) Stocks vs Bonds vs ETFs vs Mutual Funds — the essentials

Fees matter. Small annual fees compound. Example (illustrative): ₹10,000 at 8% for 20 years grows to ~₹46,600 with no fund fee. If a fund fee trims it to a 7% net return, it’s ~₹38,700—nearly ₹8,000 difference just from cost. Lower fees = more of the growth stays with you.

7) Picking a simple starter mix (3 recipes)

These are templates, not advice—always match your risk and goals.

A) Super-simple Core (one fund)

• 100% broad market index (ETF or index mutual fund).
• Rebalance annually (or just keep contributing regularly).
  For long horizons and comfort with ups/downs.

B) Balanced Starter (60/40 idea)

• 60% stock index + 40% bond fund/ETF (short/intermediate term).
• Rebalance once a year to keep the percentages steady.
  For a smoother ride than 100% stocks.

C) Core-Satellite (80/20)

• 70–80% broad stock index (core)
• 20–30% satellite: either a bond fund or a sector/tilt ETF you understand.
  Keeps things diversified while letting you explore a small tilt.

Tip: Write a one-page rule: target mix, how often you contribute, when you rebalance, and maximum % you’ll ever put in any single “satellite.” Keeping rules simple prevents emotional decisions.

8) Common beginner pitfalls (and fixes)

1. Owning too many single stocks at the start.
   • Fix: Begin with a broad ETF/index fund; add single stocks later if you want.
2. Ignoring fees (high ER, loads).
   • Fix: Prefer low-cost index funds/ETFs; read the expense ratio.
3. No cash buffer and forced selling during dips.
   • Fix: Keep an emergency fund separate from investing.
4. Chasing last year’s winners.
   • Fix: Stick to your written allocation and rebalance on a schedule.
5. Confusing ETFs with “safe.”
   • Fix: ETFs can be stock or bond—risk depends on what’s inside the basket.

9) Mini-FAQ

ETF or mutual fund for a beginner?
If you want intraday control and low fees, ETFs are great. If you prefer automatic monthly investing and don’t care about intraday pricing, index mutual funds are equally beginner-friendly.

How many funds do I need?
Often 1–3 total funds can give you global diversification. More funds ≠ better.

Are bonds “risk-free”?
No. Bonds can fall when interest rates rise, and credit risk exists for corporate bonds. But relative to stocks, they often swing less.

Should I pick active funds?
Some do well; many don’t after fees. If you pick active, watch fees and compare to a low-cost index in the same category.

10) Quick Quiz (5 Qs)

1. An ETF is best described as:
   A) A single stock B) A loan to a company
   C) A basket you can trade like a stock D) A savings account
2. Mutual funds are priced:
   A) Every minute B) Once per day (NAV) C) Once per week D) Intraday like ETFs
3. Bonds usually offer:
   A) Lower average return with lower volatility than stocks
   B) Higher return with higher volatility than stocks
   C) No risk
   D) The same as cash
4. The expense ratio (ER) is:
   A) A one-time fee B) An annual % fee charged by a fund
   C) The bid–ask spread D) A tax
5. A simple “balanced starter” often means:
   A) 100% stocks B) 100% bonds
   C) Mix of stocks and bonds (e.g., 60/40) D) Only cash

Answers: 1-C, 2-B, 3-A, 4-B, 5-C.

11) Action checklist (copy into your notes)

• ✅ Decide your risk comfort (big swings OK or prefer smoother?).
• ✅ Pick one broad stock index fund/ETF you understand (low fee).
• ✅ If you want smoother returns, add a bond fund/ETF (short/intermediate).
• ✅ Write a one-page plan (allocation %, contribution day, rebalance rule).
• ✅ Set a small automatic contribution (monthly works well).
• ✅ Revisit in 3 months: Did you stick to your plan?

1. “Asset Class Spectrum” (stocks ↔ bonds, risk/return arrows).
   • Alt: “Spectrum from lower-risk bonds to higher-risk stocks with return rising as risk rises.”
2. ETF vs Mutual Fund Cheat Box
   • Alt: “Comparison of ETF and mutual fund: trading, pricing, fees, auto-invest.”
3. Fee Drag Over Time (bar/line showing growth with 0.1% vs 1% fee).
   • Alt: “Two lines show how higher annual fees reduce long-term growth.”

Disclaimer:

This lesson is educational and not financial advice. Fees, rules, and taxes change—check official/regulated sources before acting and pick products suitable for your situation.

CTA (for the end of Lesson 2)

Next week: Exchanges & Indices — What Nifty/Sensex (or S&P/Dow) really mean and how they’re built.

Further reading 👇

Stock Market 101: Learn Stocks from Zero

FAQs

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