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- Stocks? Mutual Funds? Where should you invest?
- What are the parameters for a millennial to decide the mode of his/her investment?
With spending of 69% income every month, millennials use 50% of their earning for paying EMIs and household expenses. Millennials or Gen Y functions with a new thinking and old-school ways of savings and income spend is not their cup of tea.
While Gen X, the generation before that, would rather save a big amount of their income and then spend, Gen Y would teach you a thing or two about investing in stocks and mutual funds for quick returns.
Although Gen Y may be more financially sensible than Gen X, their ways of investment can lead to financial traps. If they invest smartly, they can perform exceptionally well. So, in this article, we will discuss whether millennials should invest in stocks or mutual funds.
Table of Contents
Stocks or Mutual Funds
With stocks, you buy shares in a company and you can enjoy equivalent profits. However, mutual funds are a collection of different stocks, and when you buy mutual funds, you have a partial share in various companies.
Mutual funds are less risky in comparison to stocks as mutual funds have a pool of bonds or stocks. Even if one company has a losing plan, bad luck, or poor management skills, the loss will be nullified by other companies’ stocks or bonds.
The mutual fund manager or the company from which you are acquiring mutual funds is responsible for making a balanced fund. However, this service has a charge, which is nominal for one person.
Mutual funds too come with challenges. You can never predict what you are getting into. Managers can change and the pool of stocks may be different. You will not be able to judge from past performance.
The risk involved in mutual funds is low. We have already discussed how one badly performing company may not affect the whole fund so much.
For instance, a mutual fund has Type A stock in it. If stock A goes down, the value of mutual funds will decrease but it will still have a pool of stocks to neutralize the effect. On the other hand, a person who only has Type A stock will suffer a huge loss.
Are You A Novice?
As a novice, it is best to start investing in mutual funds because of lower risks. Experts will be forming a pool of stocks and bonds, and these experts have financial and investment knowledge.
You can’t gain every information about the market in the starting, which poses a great risk of losing your money when investing in stocks.
Tax Gains in Stocks and Mutual Funds
Mutual funds have no tax on the capital gains, but you will have to hold equity of this fund for more than one year at least. Stocks, on the other hand, have 15% tax on capital gains that are short-term.
Investment returns are, no doubt, quick and high in stocks. However, the risk involved is also high, which brings us to the fact that it is not suggested to invest in stocks unless you have some knowledge of the industry.
Investments in mutual funds require minimum 5 to 6 years of time to show considerable returns. The time may be high, but, the risk is far less.
Although the uncertainty will always remain, it is possible to reduce some risks from our end. Hence, according to us, the best approach for millennials should be to start investing in mutual funds and study the market for 2 to 3 years. Then, you can move to stocks but start with a low amount.
Check out best mutual fund schemes here.