Stocks Vs Mutual Funds: Which Investment Mode To Choose?
Equity investments are known to give you solid returns, even though they come with increased risk. Let us take the case of Sensex, the index that tracks some of the top companies in India. It has grown more than 65% in the last five years, as of July 5th, 2022. If you had invested in the Sensex or similar composition, you could earn a similar return. This could ensure corpus growth.
Now, there are two main ways to invest in stocks – you could either invest directly or through mutual funds. Let us learn more about equity fund investments through both options for you to judge which will work better.
Investing directly in stocks
Investing directly in the stock markets contains the below steps –
- Studying thoroughly about the stock markets and how it works. You should start your learning from the very basics. Only if you know how it works you will be able to use it to your advantage.
- Understand your risk appetite and investment goals. Risk appetite will tell you how much you can afford to lose. There is an emotional and budgetary side to this. Finding out both will help you come to a good conclusion on what you can afford to lose.
- Also, make sure you have a goal set for your investment. This will help with planning as well. For instance, if your goal is to create a retirement fund, you could choose a long-term investment plan.
- Pick the stocks you want to invest in carefully. Fundamental analysis is what could help you here the most. Look at both qualitative and quantitative factors for best results.
- Once you have the stocks chosen, analyze their growth potential. Again, both technical and fundamental analysis can be employed here.
- Once you have invested, pay close attention to how your portfolio is performing. You should also make necessary changes whenever needed.
Investing in equities through mutual funds
As said above, investing in stocks can be a chore. It requires you to keep a constant eye on the markets in your portfolio and could turn out to be even a full-time job. But if you can’t afford to spend that time or do not have the expertise to manage your portfolio of your own, you could try investing in equity mutual funds. Below are the significant differences if you choose this.
- An expert fund manager will manage your portfolio for you. Your job is to assess your risk appetite and investment goals to choose a fund that matches your horizon. For instance, if you are a risk-averse investor, you could try to invest in a large-cap fund, where risk is limited. Hence, similar to investing directly in stocks, finding your risk appetite and setting a goal is also important here.
- You can invest in mutual funds even if you are not a stock market expert. But that doesn’t mean you don’t need to have the basics right. It is only that the knowledge that mutual fund investments demand is limited.
- Investing in mutual funds can ensure more diversification. There could be a humanely possible limit for diversification if you are picking stocks and managing the portfolio yourself. Mutual funds eliminate this limitation.
- Mutual funds will need you to pay an expense ratio. This is usually a percentage of your investment, which goes towards managing your fund. Since you manage your portfolio when you directly invest in stocks, this factor is not there.
Investing in stocks directly and through mutual funds are both beneficial methods. The choice between them depends on your personal preferences. Talk to your financial advisor if you are confused.
