Shares or Mutual Funds - Which is Better as an Investment Tool

Shares or Mutual Funds – Which is Better as an Investment Tool

Roboadviso     Financial Planning,Mutual Funds     Posted On, Mon 13th November, 2017     No comments
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direct equity vs mutual funds

One of the main things that an investor checks while making investments is the level of returns on offer. Higher the return, the more attractive it is for the investor.

It may also be noted that balancing the associated risk is another vital aspect of investing money; it is the very criterion that limits him/her from venturing into unknown or new investment products. Hence, in order to keep a stable portfolio of investment, it is essential to maintain the right mix of return and risk. Individuals generally go for equity-linked instruments for earning high returns on investments. It allows them to achieve their financial goals with less of an effort.

There are two main methods of investment in stock market. You may directly invest in stocks, or you may invest via equity related mutual fund schemes.

Directly investing in the stock market

One of the most sought after instruments of investment is shares and they are often used as investment tools for maximizing the total return. It is however important for investors to have comprehensive knowledge about the markets, including technical and fundamental analysis, for better understanding of the long and short term trends of varied stocks. If the stock performance is according to expectations, then the returns on such direct investments can be substantial. However, it is also possible for loss of principal if stock performance is opposite of expected trend.

It is important to regularly check the stock investment portfolio and keep up-to-date with news which may have an effect on the stock markets. Sometimes, the performance of the stock market may not be as expected and hence investors will have to wait for a longer duration to receive the right kind of profits/returns. Timing the market is vital while directly investing in stocks. The rule of the thumb is ‘Sell on highs and buy on lows.’

It is also very important to book the profit at the correct time to be able to get the desired return, else the share may drop from its peak level and then you will need to wait for a longer time to receive an appropriate yield. Just as is the case with other investments, you should put your money in stocks as per your financial status so as to avoid experiencing any liquidity crisis.

If you wish to directly invest in shares, then you should have the necessary skills and other aspects like expert stock market/industry knowledge, sufficient funds, and high level of patience, etc.

Investments in equity linked mutual fund schemes

It is easier for individuals to invest in stocks via mutual fund schemes as such funds are handled in a very professional manner. The amount invested by people in mutual funds is managed by professionally trained fund managers who use their expert skills, techniques, and varied tools to understand the market movement. Individual investors don’t posses such skills nor have access to analytical tools. Investment in equities via mutual funds does not require investors to study about varied stocks and their respective performances.

Diversification of the portfolio to minimize risk is taken care of by the fund managers. All that you need to do is verify your expectation of investment return and then choose the mutual fund that will most likely offer you the desired return in a specific time period. There are many investment choices with mutual fund schemes and each one of the funds have been designed to suit individual risk capacities, investment time period, and return expectation, etc. Some of the popular equity-linked mutual fund categories are large cap mutual funds, sectoral mutual funds, mid and small cap mutual funds, and diversified equity mutual funds, etc.

Mutual fund also permits investors to put their money in unique schemes like ELSS  or Equity Linked Saving Scheme fund and get taxation benefits as per section 80 (C). These types of MF investments have a lock-in time period of three years. After the 3 year period is over, the return earned on the investment is also tax free.

Mutual fund permits investors to put a lump-sum amount into a mutual fund, or to go for investments via instalments under the SIP or Systematic Investment Plan. People who make investments via SIP have the option of choosing a specific amount which will be invested at periodic intervals for a specific time period. SIP offers investors to benefit from the gains of Rupee cost averaging over the SIP’s tenure and mitigate the risk of unpredictability in the long run. 

Stocks vs. Mutual Funds

People who are willing to give adequate time to keep a regular watch of the stock portfolio can go ahead and put some of their money directly into the stock market.

Equity based mutual fund offers investors an objective-focused opportunity of investment. You can put your money in different kinds of equity mutual funds according to your financial goals. If you want to gain double the benefits, i.e., investment gain as well as tax savings, then mutual funds definitely has a one-up over direct investments in stocks. When it comes to cost of investment, the charges levied by mutual funds are significantly lower as compared to the cost of direct transaction in stocks. Investors seeking relatively low risk options should go for mutual funds as it offers the right balance of risk and return with minimal effort on your part.

What is the right time to make investments in equities?

So far in the year 2017, the stock market has shown an upward trend despite the slowdown in growth after demonetization and implementation of new GST tax regime. It is expected that the growth path will most likely continue, but still it is quite hard to predict when a downturn will hit the stock market.  Hence, people who want to put their money in stocks during this period should go for investments in equity linked MFs via SIP to ensure a secure and safe earning, even in future situations when stock market movement is not according to expectations.

 

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