In the current scenario, investors with 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 in mutual funds for wealth creation? If yes, why? And if in stock why?
While an investor’s risk appetite will certainly play a definite role in determining where they will invest, here’s a perspective on both.
mutual funds
and direct stock investing.
What is stock market investing?
Direct stock investment is when a retail investor invests in direct shares of a company/s of his/her choice. When you invest in the stock of a company, you are allotted shares of the company, making you a shareholder of that company. Investors are allotted shares in the investment amount and in amounts based on the current share price of the fund. Investors can choose to invest in the shares of any company based on their investment objective and investment budget. When the company grows and its share price rises, the investor benefits, adding value to the investors’ shares.
What are Mutual Funds?
A mutual fund is a pool of professionally managed funds that invest in a diversified portfolio of securities for income generation. Mutual fund managers follow an investment strategy to buy/sell the security in such a way as to achieve the investment objective of the plan. Every mutual fund scheme has an investment objective. Fund units are allotted to mutual fund investors along with the investment amount and based on the current NAV (Net Asset Value) of the fund. Based on the performance of the Mutual Fund scheme, the NAV appreciates/depreciates.
What Makes Mutual Funds Better Than Direct Stock Market Investments?
Investing in direct equity markets can give high returns to the investors. But there are some risks associated with investing in the equity stock market which can prove to be volatile. In the same scenario, investing in mutual fund schemes may be able to balance the investment risk due to their diversified portfolio.
Here are some of the reasons that make investing in mutual funds a more viable option –
Diversification – a
mutual fund scheme
Diversifies your portfolio by investing in different asset classes and money market instruments. A single mutual fund entity is a combination of several stocks and assets. So even if one asset class underperforms, investing in another asset class may be able to make up for the loss. Stock market investing cannot offer this kind of diversification because you are investing in just one company. If that company’s stock falls, the value of your shares will fall as well.
Anyone can invest- When it comes to mutual fund investing, one does not need to have in-depth knowledge of the market. Mutual Funds are managed by a team of expert research analysts and fund managers who use their industry years of experience to drive the performance of the scheme. An equity stock portfolio is controlled by the individual himself, thus making it imperative to have a thorough knowledge of the markets.
Be it the stock market or mutual funds, make sure to discuss your goals with your financial advisor before making an investment decision.