- Can’t figure out whether to invest in stocks directly or do so via a mutual fund?
- Read this post and know what you need to do when faced with such a situation
In pursuit of having more money to fulfill our wishes, we keep on examining various investment options. Be it real estate, stocks, mutual funds or fixed deposits, there is always this dilemma of investing more in one over the other. Usually, these decisions are taken based on the information we get from the internet, friends, elders, colleagues, etc.
Sometimes we tend to go blindly by “what is currently hot” and “what everyone is buying”. Real estate was in fancy between 2007-2013, then 2014 onwards investing in stocks and mutual funds has been popular. Between the two, some prefer buying only stocks while some want to invest through mutual funds. There are also people who own both. So, what is the ideal thing to do?
Let us understand the pros and cons of both.
Investing Directly in Shares
- People have made fortunes by investing in shares and there are many who have lost everything they had.
- Firstly, let us be very clear that investing in equities whether through shares or mutual funds has a risk, this risk is more when investing directly in shares. Let us see how.
- There are about 7800 companies listed on the Indian stock exchange, just looking at this number the first thing that comes to mind is-how will I know what all these companies do?
- How will I know which are the best amongst these? Well, larger companies whose products we use every day like SBI, Bharti Airtel, ITC, Infosys, etc, seem a common sense choice.
- But will these give me good returns? How much should I invest in each? How many shares should I buy? When should I sell these shares?
- There are many more questions which one needs to get answers for, before investing directly in shares.
- How do you get the answers? By doing the research yourself for which many of us do not have time or expertise, also it is not a one time research. Market dynamics change every day, a share which is a good buy today might not be a good buy next month. This could happen due to changes in the fundamentals of that company or that sector.
- Therefore, we recommend you to invest directly in shares only if you have the requisite knowledge, have the time to research and understand the financials & business of the company whose shares you intend to buy.
Investing in Mutual Funds
- Mutual funds are a great alternative for people looking to invest in shares.
- Most of the disadvantages or shortcomings of investing directly in shares are taken care of by investing in mutual funds.
- Mutual funds have a dedicated research and fund management team that manage your money. These are people who have the right skill sets, experience, knowledge, and qualification to manage money.
- When investing in equity mutual funds, you are investing in a set of shares that have been shortlisted by the mutual fund after thorough research.
- Also, most funds follow an active fund management strategy where shares are bought and sold basis change in their fundamentals, you might not be able to do this when you directly buy shares.
- The cost of investing mutual funds is the lowest among all financial products. In the direct plan, one can buy by paying as low as 0.20% annually to the mutual fund company, these costs are higher in a regular plan where you avail the services of an advisor.
One should invest in shares only if you understand the company’s business in and out. You should research the products/services they offer, growth strategy, financials, outlook, management quality, sector they operate in, company’s history & performance, risk & return ratios. This research should be ongoing. If you can do this, well investing in shares is a good idea. However, if you don’t have time and the expertise to do all this leave it to the mutual fund, you should focus on your work, look to increase your earnings and let the mutual fund investment take care of wealth creation.