Finance

Mutual Funds vs Direct Stock Investing: 3 Ways to know which is Suitable for you

Both the avenues have upsides and downsides, sharing the same ultimate goal of generating maximum returns. Let us differentiate between both the investing style before you make the decision for investment.

When you invest in shares, you get a little ownership of the company and get the returns either as a capital appreciation i.e. increase in the value of a stock or through dividends. 

Whereas when you invest in mutual funds you own a unit of the fund. That unit, if increased, gives you profit on selling. Mutual funds basically pool the money of investors and invest in a wide range of asset classes like equity, debt, and commodity. They are managed by the professionals who invest on your behalf and manage your portfolios. 

Below are some aspects you need to know about and questions that need to be asked yourself before making an investment decision.

  1. Familiarity with the nitty-gritty of the market 

Direct investment can be complex as it requires the dedication of sufficient time to study the market trends and manage the risks to ensure a higher return. In this case, you rely on your knowledge, skills, and experience which may not prove to be fruitful as your area of research is limited.

On the other hand, a mutual fund is a product created for the newbie and those people who can not spend much time on research. A mutual fund scheme is a large pool of savings that is managed by a fund manager who is a market expert. Fund managers who are in charge of running mutual fund schemes have years of experience (often decades) behind them and receive constant support from a well-formed research department that is at the core of every successful fund house.

Analyze and test your knowledge through trading simulators to see which option is fit for you. 

  1. Volatility, risk & return

Direct equity investors generally keep a portfolio of 5-10 stocks and their returns fluctuate highly on the basis of the selective stocks. Volatility is high and so is the risk, returns can be high given the right selection of stocks that are in sync with the financial goals of the investor.

Mutual funds keep their investment diversified into various stocks or securities. So if one goes down, they are compensated with the returns of others. Thereby, keeping the risk and volatility low. However, investors get an average of all the returns generated through different asset classes, which brings down the return for a single portfolio owner.

Know your risk appetite and return expectations to choose a suitable scheme for yourself.

  1. Active or passive investing

Another important factor to consider before selection is to answer the question-”do you have enough time to do research and trade” which in turn decides which type of investor you are.

Do you have time to care for your investment portfolio? Are you able to effectively manage risk when the stock market is volatile? If your answer is ‘no’ to either or both of the above questions, then you might want to stay away from direct investments in the stock market. You fall under the category of passive trader. 

When you choose to invest through a mutual fund, you are relieved from analyzing, picking, timing, tracking, and managing the purchase. Everything is managed by qualified and experienced fund managers who are active traders. 

You may choose to diversify your investments and invest in both individual stocks and mutual funds if you have some knowledge of stock market risk. Your investment portfolio can be set up to achieve specific objectives, such as making regular payments over time for SIPs and receiving dividends from blue-chip companies. The most popular way adopted by millennials nowadays is to divide their capital in half for each of the schemes for better liquidity and returns over a long period of time.

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