Giventhe complexities of investing, it can be overwhelming for investors to decidewhat type of investments to make. The Indian market offers a variety of optionsfor investing in equities, two of the most popular equity investing options arestocks and mutual funds.
Bothstocks and mutual funds have advantages, but which one to choose for yourfinancial needs? Investors must understand the difference between investingdirectly in equity and through mutual funds to make the right decision.
Keepreading as we discuss the differences between investing directly in equity andinvesting through mutual funds.
What are Direct EquityInvestments?
Direct equity investments involve buying shares of individual companies on the stock market. Investors can choose to invest in stocks themselves or through a Portfolio Management Services (PMS) provider. PMS providers provide tailored investment services and personalized financial advice.
Wheninvestors buy shares of an individual company, they are exposed to risksassociated with that particular company’s performance. Direct equityinvestments also require considerable research and analysis on the part of theinvestor before investing, making them best suited for those with someknowledge about the markets and/or access to expert advice.
Forexample, if an investor owns shares in a particular company, it is important totrack the performance of the individual stocks and monitor them regularly toensure their portfolio remains profitable.
What are Mutual Funds?
Mutualfunds are collections of different types of securities that professional fundmanagers manage. These fund managers use a mix of strategies and investmentanalysis to determine which type of securities should be included in the fund’sportfolio.
Investorscan choose between open-ended mutual funds, closed-ended mutual funds, orexchange-traded funds (ETFs). Open-ended mutual funds allow investors to buy orsell their units anytime, depending on their financial needs. Closed-endedmutual funds, however, have set dates for buying and selling units. ETFs trackthe performance of an index like the Sensex and Nifty 50 and invest in a basketof stocks based on the underlying index.
Mutual funds offer diversification benefits as each mutual fund scheme invests in multiple stocks or bonds.Fund managers also perform regular portfolio management to ensure the portfolio remains profitable. This means that investors can invest in a diversified portfolio with little effort while relying on professional fund managers to make intelligent investment decisions.
Direct Equity Funds vs.Mutual Funds: Know The Major Differences
Bothdirect equity investments and mutual funds come with their advantages anddisadvantages. So, it is important to understand the differences between thesetwo investments before deciding.
Amount Invested:
In thecase of mutual funds, you can start investing with a much lower amount ascompared to direct equity investments. For example, you can start investing inmutual funds with as little as Rs 500.
On theother hand, when it comes to equities, the amount you need to invest willdepend on the value of the stock. For example, if you decide to buy shares ofTata Motors Limited, a single share will cost you INR 378.50 (at the time ofwriting this article). A single share won’t give you higher returns, so youmust invest in multiple stocks. This will require more money than what isrequired for mutual funds.
Control:
Wheninvesting in mutual funds, you have little control over the investments anddepend on the fund manager to make sound decisions. However, when investingdirectly in equity, investors have greater control over their investments asthey can monitor and track the performance of individual stocks and takeimmediate action if required.
Risk:
Mutualfunds offer diversification benefits so that an investor’s portfolio is notexposed to too much risk. Since direct equity investments involve buyingindividual stocks, investors are more exposed to risk associated with thoseparticular companies than with a mutual fund.
Liquidity:
Regardingliquidity, direct equity investments offer more flexibility as you can sellyour shares whenever the market is open. However, this can go both ways becausestock prices can also decrease. Mutual funds are more liquid than direct equityinvestments, as you can quickly and easily redeem your units at any point.However, they come with certain restrictions and redemption policies.
Convenience:
Mutual funds might be the better option if you’re investing, as it takes very little effort to get started. Portfolio Management Services provided by mutual fund houses and online platforms make it even simpler for investors to manage their portfolios with minimal effort. Meanwhile, when investing directly in equity, investors need to study each stock individually and be constantly aware of market fluctuations.
So, What Should YouChoose?
Ultimately,the decision depends on your personal goals. Mutual funds might be the betteroption if you start out with investing as they offer safety, convenience, and alower entry barrier.
On theother hand, if you want greater control over your investments and don’t mindmonitoring them regularly, then direct equity investments may be the rightchoice for you. It is always recommended that investors shouldconsult with an experienced financial advisor before making any investmentdecisions. This ensures that their portfolios meet their individual goals whileavoiding unnecessary risks.
