In the recent year, almost 1 crore new demat accounts were established. To put things into perspective, just 49 lakh demat accounts were established in 2019.Whether it was the shutdown or the market rise or low deposit rates, there is no disputing that the interest in shares has soared with the stock markets returning to all-time highs.
But should first-time investors participate in equities by directly buying stocks, or should they go for Mutual Funds? In this article, we look at the advantages and drawbacks of each so you can take an informed decision whether you decide to put your hard-earned money into the stock market to reach your financial objectives or seek to develop wealth for the long term.
Stocks are financial securities issued by corporations, which offers Investors part ownership in a firm. Investors put their excess into stocks largely for capital appreciation, dividends, and also for voting rights, which allows them to be a part of critical corporate decisions.
Mutual Funds, on the other hand, are financial entities wherein money is mobilized from multiple investors and invested into diverse asset classes like stock, debt, gold, etc., based upon the investment goal of the Fund.
Mutual funds pool money together from a group of participants and invest that capital into diverse securities such as stocks, bonds, money market accounts, and others. Funds have distinct investing objectives, to which their portfolios are geared. Money managers are accountable for each fund. They produce income for investors by distributing assets inside the fund.
Mutual funds may hold many different stocks, which makes them particularly attractive investment possibilities. Among the reasons why an individual may opt to buy mutual funds instead of individual stocks are diversification, convenience, and cheaper expenses. Also, mutual funds and stocks are built for two separate group of investors. Let’s compare them so you can determine what’s the greatest option for you.
Understanding stocks and mutual funds
Stocks happen to be more riskier than mutual funds. The risk in mutual funds is dispersed throughout a range of goods. Investing in stocks requires investors, especially those just beginning, to perform significant study. In mutual funds, the research is done by professionals as a professional fund manager is responsible with managing the pool of investment. But this service by a domain specialist comes with an annual cost.
Investing as a novice
New investors are encouraged to begin with mutual funds to get acquainted with the market. Also, the fund manager, with years of expertise and the ability to study and comprehend financial data, would be making the decisions based on his insights. With the fund manager performing the research, it is he who needs to invest time while you may be passive. Those who invest in stocks have to track and assess their investments themselves.
Risk vs return
As noted before, mutual funds offer the advantage of minimizing the risk by spreading an investment throughout a portfolio. Stocks, on the other hand, are sensitive to market swings, and the success of one stock can’t compensate for another.
If you sell your stock holding within a year from the acquisition date, you will have to pay short-term capital gains tax at the rate of 15 per cent. But there is no tax on capital gains on the equities that are sold by the fund, a big benefit. With mutual funds, you can claim tax benefits under Section 80CCG as well as 80C if you have an equity-linked savings program.
Investing in mutual funds needs 5-7 years to earn high profits. Stocks may provide you significant returns if you buy in the correct ones and sell them at the appropriate moment.
he ease of mutual funds is definitely one of the primary reasons investors pick them to offer the equity element of their portfolio, rather than buying individual shares directly. Some investors find that buying a few shares of a mutual fund that fulfills their basic investing criteria simpler than finding out what the firms the fund invests in actually do, and if they are excellent quality investments. They’d like to leave the research and decision-making up to someone else.
Determining a portfolio’s asset allocation, analyzing individual stocks to locate firms well-positioned for growth as well as keeping a watch on the markets is all highly time-consuming. People commit whole lives to the stock market, and many still end up losing money on their investments. Although investing in a mutual fund is certainly no assurance that your assets will improve in value over time, it’s a smart method to sidestep some of the tedious decision-making involved in investing in equities.
Should You Opt For Direct Stocks or Mutual Funds?
An investor should constantly have an open mind and invest through both platforms. Here are some variables to consider:
There are more than 5,000 stocks which are listed in the equities markets and it is not practicable for a lay individual to follow all these stocks. In truth, it is incredibly difficult to maintain a portfolio of more than 20 equities.
If your forte is large cap stocks, then you may invest in the midcaps and small caps through the mutual fund way and vice versa.
Mutual funds adapt themselves quite well to the SIP investment methodology. They assist you to gain the benefit of rupee cost averaging. At the same time, you do not need to worry about whether the markets are costly or cheap since you are purchasing every month. Direct stock investment is a wonderful choice for lump sum investing, as and when attractive possibilities present themselves.
An investor can decide on a proper ratio to be maintained between mutual fund and direct stock investing. This ratio can be set by each investor depending on the parameters outlined above.
If you are optimistic on a whole sector and are not sure which particular stock will do well, it might make sense to invest in a mutual fund with that sector in focus. For example, investors who are optimistic on the healthcare industry and do not sure which individual firm will do well, might invest in healthcare funds.
Do not ever try to compare the returns on your stocks with that of a fund. There will always be a probability that you will outperform the fund. Direct equities investments have distinct points of entry and would not match those of the mutual fund. Hence one should avoid comparisons.
Mutual funds are not only about stock; they also allow you the ability to hold an investment that is part-equity and part-debt and, at times, even part-gold.
In a mutual fund, you may actually forget about the investment and it will undoubtedly increase over the long run as there is a professional handling it. The same is not the case with a stock; you would be incredibly happy if you had selected Wipro and rather bad if you chose Kingfisher Airlines.
Mutual funds are exceptionally helpful for developing a goal-oriented portfolio, like for instance, for your retirement, children’s education, etc. Building a successful stock portfolio might be helpful for leaving a good legacy.