In the current scenario, investors who carry moderate to high or very high risk appetite have two investment options – they can either invest directly in the stock market or they can consider investing in market linked schemes like mutual funds. But should one invest their hard earned money for wealth creation in mutual funds? If so, why? And if in stocks, then why?
Although an investor’s risk appetite will definitely play a definitive role in determining where they will invest, here’s a perspective on both
mutual funds
and direct stock investment.
What is stock market investment?
Direct stock investment is when the retail investor invests in direct stocks of a company / companies of their choice. When you invest in a company’s stock, you are allotted company shares thus making you a shareholder of that company. Investors are allotted shares in quantum in the investment amount and depending on the fund’s existing share price. Investors can choose to invest in any company shares depending on their investment objective and investment budget. The investor will benefit when the company grows and the value of its share price increases, adding value to the shares of the investors.
What are mutual funds?
Mutual funds are a pool of professionally managed funds that invest in a diversified portfolio of securities for income generation. Mutual funds managers follow an investment strategy buying / selling security such that the investment objective of the scheme is achieved. Every mutual fund scheme has an investment objective. Mutual fund investors are allotted fund units in quantum with the investment amount and depending on the fund’s existing NAV (net asset value). Depending on the performance of the mutual fund scheme, the NAV appreciates / depreciates.
What makes mutual funds better than direct stock market investment?
Investing in direct equity markets may fetch investors high returns. But there are certain risks involved with equity stock market investment that can prove to be volatile. In the same scenario, investment in mutual fund schemes might be able to balance the investment risk due to their sheer diverse portfolio.
Here are a couple of reasons that make investing in mutual funds a more feasible option –
Diversification – A
mutual fund scheme
diversifies its portfolio by investing in various asset classes and money market instruments. One single mutual fund unit is a combination of multiple stocks and assets. So even if one asset class underperforms, investment in other asset classes may be able to even out the losses. Stock market investment cannot offer such diversification as you are investing in just one company. If the stock of that company falls, so will the value of your shares.
Anyone can invest – When it comes to mutual fund investments, one does not need to have in depth market knowledge. Mutual funds are managed by a team of expert research analysts and fund managers who use their years of industry experience to have the scheme perform. An equity stock portfolio is handled by the individual himself / herself, thus making it mandatory to have an in-depth knowledge about markets.
Be it stock market or mutual funds, make sure that you discuss your goals with your financial advisor before making an investment decision.
