Looking at the way different asset classes have behaved over the years, you will find that equity is the only class of assets that has beaten inflation hollow. Thus, it has created tangible wealth for investors. If you are a young investor, equities are undoubtedly for you and your investment goals. Nonetheless, you may be facing a true dilemma when you question whether you should invest in equity directly through the markets, or via mutual funds. Comparing both kinds of investment based on a variety of factors can help you to make informed decisions.
When you consider the parameter of risk, in direct investment of equities, investors need to be attentive to managing risk in their portfolios. There’s a way to get around this by doing enough research before purchasing stocks. If you buy stocks across varied sectors and capitalization at small, large and medium-cap, you can mitigate losses. In case you want to guard against overexposure to particular stocks, you can establish caps. Now coming to mutual funds, the management of risk is tackled by the manager of the fund. If you purchase a mutual fund scheme, you essentially buy a mixed bag of 40-50 stocks at the minimum. These range across sectors and caps. On a number of parameters, the fund manager looks after your investment.
Investment in direct equities, gives you returns that may be high. Compared to mutual funds, the potential for returns through equities is mainly dependent on the stocks you choose, and your ability to enter the market and exit it at the appropriate time. Returns on investment may be high, but so are risks. On the other hand, you shouldn’t expect skyrocketing returns with mutual funds. This is because the fund manager balances funds in such a way to diversify portfolios, reducing risks. The main goal is to generate returns that are higher than a benchmark. The least possible risk is taken with mutual funds.
When you invest directly in equities, you save time and effort as online trading with a brokerage is a quick process. However, before you do go ahead with investment in direct equities, you need to do some groundwork. This takes some time and a considerable degree of effort. For instance, you have to learn how markets operate and about the stocks you hope to invest in. Added to this, you have to keep an eye on your stock performance each month. You also have to open Demat and trading accounts before investment takes place. The effort and time that you expend with mutual funds is relatively less compared to that spent on equity investment. A lot of the information on stocks in any given fund is ready for you online and you don’t have to search for it. Moreover, you can easily take a chance on schemes that have a history of good performance. Although you do need a Demat account, you don’t have to partake in trading yourself and a fund manager deals with your fund on your behalf.
So if you are a young investor, which should you pick, equities or mutual funds? Analysts feel that mutual funds give young investors a background for a robust foundation to build a portfolio. A little later, you can think of equities. Investment in both may seem easier when you’re a little older, and you should explore a good brokerage like Motilal Oswal, whatever you decide.
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