Mutual Funds vs. Direct Stocks
Mutual funds provide its investors with a diverse choice of asset class alternatives. Mutual funds, for example, allow you to invest in stocks, bonds, gold, and other assets. For some time now, the stock market index has been soaring. Direct stock investment also has the chance for tremendous rewards.
So, if you’re wondering whether is a better investment option for you, here are some key considerations to assist you make an informed selection.
Are you a first-time investor?
If you are new to investing and don’t know much about risks and returns, mutual funds may be a better option than direct stock market investments. You can also invest in mutual funds in instalments through a systematic investing plan (SIP). You can also choose different asset classes to invest in based on your financial goals, expected returns, and risk tolerance. Mutual fund corporations are managed by highly competent fund managers who can make more informed investment selections in a tumultuous market. Direct stock investing can be quite dangerous for a beginner investor, as a bad decision can result in huge losses.
Do you have enough time and expertise to minimise risk while ensuring a good return?
Do you have enough time to manage your investing portfolio? Can you properly manage risk in a volatile stock market? If you answered ‘no’ to either or both of the preceding questions, you should avoid direct stock market investments and instead invest in top-rated mutual funds. If, on the other hand, you answered ‘yes’ to both questions, the stock market can provide you with numerous opportunities to earn an appealing return.
To secure a larger return while investing directly in the stock market, you must devote sufficient effort to studying market trends and managing risks. If you invest in a mutual fund, the fund manager will manage the risk in the scheme and may deliver the best return in all market situations.
Do you want to diversify across asset classes?
As previously stated, mutual funds may be the greatest alternative for you if you want to invest in several asset classes such as stock, debt, and gold. Direct stock investing expose you to only one asset class, so you may miss out on the diversification benefits provided by the mutual fund platform. In mutual funds, you can also choose the investment type based on your time horizon and financial goals.
For example, if you wish to invest for the short term, you can invest in liquid or short-term debt funds; for the long term, you can invest in equity funds and equity-linked savings schemes (ELSS) for a tax deduction benefit of up to Rs 1.5 lakh in a fiscal year under Section 80C of the I-T Act. Direct stock investments do not qualify for tax breaks.
Do you have any experience with stock analysis?
Direct stock investing can provide excellent returns if you have expert knowledge in selecting the proper shares based on your risk tolerance (i.e. independent information rather than expert advice or hearsay). However, you should preferably be familiar with equities research methods such as technical and fundamental analysis, and you should always be up to date on news about your stocks. You don’t have to be a financial expert to invest in mutual funds. Basic information, on the other hand, could be really beneficial. A mutual fund may not generate a multi-bagger return like the stock market, but it can provide a reasonable return with lower risk of loss if you invest wisely.
What should you do?
Mutual fund investments typically appeal to all types of investors, including those with a low risk tolerance. You can select the mutual fund scheme(s) that best meet your financial and diversification objectives. Direct stock investments are intended for individuals who understand the market and are willing to accept the necessary risks. You can also pick between mutual funds and direct stock investments based on your stock market expertise, return requirements, risk tolerance, diversification requirements, and time available to handle your assets.
Also Read: The Benefits of investing in Bonds!