Which is Better: Direct Stocks or Equity Mutual Funds?
When you ask someone if they have invested in stocks, the most typical response is “no baba; it is highly hazardous.” My fixed deposits satisfy me.’ Their reaction is based on what they have witnessed or experienced among their friends. While everyone understands that equities provide the best long-term returns, the risk involved with them deters many investors from doing so.
However, many consumers are unaware that there is another, more convenient option to gain equity exposure: mutual funds.
Mutual funds aggregate money from a variety of investors and are managed by professional fund managers. When you invest directly in equities, you can choose the stock you want, but when you invest in a mutual fund, the fund manager makes the investment decisions. Here are some of the key differences between Mutual Funds and Direct Stocks to help you decide which is best for you.
To invest in mutual funds, you don’t need to be an expert.
You don’t need to be an exceptional stock picker to invest in equities through mutual funds. According to their investing objectives, fund managers select equities that they believe will be the best for their investors. You must conduct research and select stocks in the case of direct equities. Many people are seen investing in stocks based on the advice of a buddy, and here is where they go wrong and end up with sour memories. Direct stock investing necessitates knowledge. If you are fresh to the world of investing, mutual funds are a better choice.
Mutual funds have a lower risk than investing directly in stocks.
Direct stock investments have a higher risk than mutual fund investments. Mutual funds offer a diverse portfolio, with fund managers typically investing in 30 equities spanning various industries and market capitalizations. This lowers the risk of investing in a single stock. For example, if stock A is underperforming owing to a sector-specific issue, the underperformance will be mitigated by the portfolio’s other stocks.
Furthermore, the market regulator has set a 10% investment limit on a single listed stock. That indicates that if the fund’s entire assets are Rs.100, the total investment in one stock cannot exceed Rs.10. When opposed to investing in direct stocks, where your entire allocation to a single stock in your portfolio would be higher, this reduces risk.
Long-term investment in equity mutual funds
Equities are more volatile in the near term, but their returns average out over time and provide more attractive returns than other asset classes. Direct stocks are available for both trading and investing. Equity mutual funds, on the other hand, are only suitable for long-term investments. If you invest in equity funds for more than five years, you could get a good return.
Use SIPs in equities mutual funds to achieve your objectives.
Discipline is a crucial component of investing. You’ll be able to achieve your objectives if you use a rigorous strategy. A systematic investment plan is a feature offered by mutual funds that allows you to invest a set amount of
money on a regular basis (SIP).You will be investing in a predetermined amount of money regardless of the market levels if you invest in equities mutual funds through SIP. One of the most essential features of SIP is rupee cost averaging. When the market is rising, you’ll get fewer units, and when the market is falling, you’ll get more. The investment amount will be deducted automatically from your bank account after the SIP mandate is activated. You have the best of both worlds in this situation. Direct stocks, on the other hand, do not allow you to automate your investments and pay a fixed sum each month.
When deciding whether to invest directly in stocks or through mutual funds, consider what type of investor you are. Do you have the industry knowledge or time to conduct comprehensive market research in order to select the best stocks for you? Are you willing to take the risk of investing in only a few stocks? If you answered no to these questions, investing in shares through a mutual fund may be the best option for you.
Get in touch with a financial advisor if you want to learn more about mutual funds. He or she will be able to assist you and answer any questions you may have. Invest wisely!