Should you invest in Direct Equities or Mutual Fund?
This is the most common question that all investors ask me when we discuss equity investments.
Interestingly, Do you know that in India, individual investors hold more stocks than they have mutual funds? Only about 4.5% of the total market capitalisation in India is held through equity funds, whereas direct holding by individuals is nearly 22% of the market capitalisation. But investing in direct share market requires certain skill lets and attributes, lets understand both Mutual Funds and Direct Equities more…..
Stock market investing means investing directly in the stocks of the company. Here, you are purchasing the companies listed on the stock exchange with an expectation to earn profits when the price of that stock goes up.
On the other hand, a mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, FDs, bonds, etc. A professional fund manager manages this fund. When you purchase a share in the mutual fund, you have a small stake in all investments included in that fund. Hence, by owning a mutual fund, the investor participates in gains or losses of the fund’s portfolio.
- Volatility in investment.
Direct investing in stocks has more volatility when compared to mutual fund investing. This is because when you invest in shares- you generally purchase 10-15 stocks.
On the other hand, the mutual fund consists of a diversified portfolio with investment in different securities like stocks, bonds, fixed deposits, etc. Even the equity-based mutual funds invest in at least 50-100 stocks. Due to the broad diversification, the volatility in the mutual funds is a lot less compared to that of shares.
My Take – If you are first time investor, you should stick to Mutual Funds and understand the different categories of funds, movements under volatility and have deeper understanding about your investments.
2. Return potential
Stock market investing has a very high return potential, most of the successful investors like Warren Buffett, RK Damani, Rakesh Jhunjhunwala, etc. have built their wealth by investing directly in the stock market.
However, this is only one side of the story.
The complete fact is that the majority of the people lose their money in stock markets. Although the return potential is high while investing in stocks, however, the risk is also higher.
On the other hand, most of the good ranked mutual funds have given decent consistent returns to their shareholders. Although the returns are not as high as what many successful investors can make from stocks, however, this return is enough to build a massive wealth for an average person for a secured future.
Investing in the stock market requires frequent monitoring. This is because stock market investing is a personal thing. Here, no one is going to do this for you and hence you have to monitor your stocks yourself. Moreover, due to the high volatility of the share market, the frequency of the monitoring should be higher. At least every quarter or half yearly.
On the other hand, for the mutual fund -there are fund managers who take care of the investments and make the buy/sell decision on your behalf. That’s why, when you invest in mutual fund, you do not need to monitor your fund much frequently. Anyways, you should watch your funds at least every year so that you can confirm that your fund’s performance is in line with your goals.
It is always recommended to check and do a portfolio review regularly ( Once in 4 Months atleast ) with your financial Advisor.
4. SIP Investment
Mutual funds investment provides you with an option of a systematic investment plan.
A Systematic Investment Plan refers to periodic investment. For example, the investor can invest a fixed amount, say Rs 1,000 or 5,000, every month (or every quarter or six months) to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.
5. Asset class restriction
While investing in the stock market, the only asset where you can spend is stocks of the company.
On the other hand, the mutual fund gives you an opportunity to invest in a diversified portfolio. Here, you can invest in a variety of asset classes. For example- debt mutual funds, equity-based mutual funds, gold funds, hybrid funds, etc.
6. Ease of investment
For investing in the stock market, you have to open your brokerage account with the help of a stockbroker. Here, you need to start your Demat and trading account which can take as long as a week to open.
On the other hand, you can start by investing in a mutual fund within 10 minutes. You do not require any brokerage account to start investing in mutual funds.
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Conclusion – If you are first time investor or a beginner, you should stick to Mutual Funds and understand the different categories of funds, movements under volatility and have deeper understanding about your investments, appreciation and benchmark returns. Once you gain the expertise and sufficiently diversified in mutual funds, then you should participate in Direct Stocks.
Reach out to me for Both Mutual Fund and Direct Stocks investment to increase your wealth and networth.
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