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Direct Equity Investing vs. Investing in Mutual Funds
Investing in equities can be rewarding for those who have adequate knowledge of the stock markets and have the ability and appetite to take risks. But more often than not, retail investors lack the knowledge and even the time to research and educate themselves about the nitty gritties of stock market movements. In such cases, it is best to leave your hard earned money in the care of professional money management experts or fund managers of mutual funds.
Investing in equities can be complex
When investing in equities, you have a lot of factors to consider such as industry, sector, size and structure of the company and management track record.
All of these factors must then be juxtaposed against the overall macro economic condition to assess the potential of the stock you wish to invest in. This is as far as fundamental analysis is concerned. There are other tools for technical analysis available for the investor who has the acumen to use such tools.
Investing in mutual funds is therefore a more suitable route to participate in the stock markets, without specialized knowledge or experience.
Opting for professionally managed equity investment funds
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.
Each mutual fund scheme has its objective stated upfront which determines whether it is conservative or aggressive in its style of fund management. The performance of mutual funds is also widely tracked and analysed daily. Such analysis is easily available in the public domain.
Over and above, mutual funds are regulated by the capital market regulator Securities and Exchange Board of India (SEBI). Therefore, when you invest in mutual fund schemes of fund houses with established track records, you are well positioned to receive good returns over a period of time.
Let us look at the differences and similarities between investing in mutual funds vis-a-vis direct investments in equities.
DIFFERENCES
FEATURES DIRECT STOCK INVESTMENT MUTUAL FUNDS
Control of an investor on stock selection Complete control No control
Ability to buy and sell Possible at any time when the trading session is in progress On every business day
Entry or exit from single stock Possible Not possible
Exit load Not applicable Applicable
Individual selection of stocks Possible Not Possible
Speculation Possible Not Possible
SIMILARITIES
FEATURES DIRECT STOCK INVESTMENT MUTUAL FUNDS
Sectoral picks Possible Possible
Systematic Investment Yes Yes
Tax benefits Yes (80CCG) Yes (80CCG and 80C)
Liquidity High High
In a nutshell it would be safe to conclude that you can consider investing directly in equities, if you are skilled enough to do so and can dedicate the time and research such investment requires. If you do not have either, it is best to opt for the mutual fund route to make the most of the professional fund management to enhance the value of your investments. It is however recommended that whatever route of investment you choose, you take a look at regular intervals and assess whether your financial goals are being met as a result of your investments.
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TIPS
#1
If numbers, charts and analysis of stocks excite you, consider direct investment into equities.
#2
Do not experiment with direct investments if you do not have the requisite knowledge or time to track the markets.
#3
Choose a mutual fund scheme based on your risk appetite and review its performance periodically.
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