For investment purposes, one can invest in mutual funds or can choose to buy equity stocks individually. You might wonder which one of these options is best suited for you. Remember, that investment is not just a one-step process. It depends on your age, risk appetite, liquid cash and various other factors, including ability and inclination to manage a share portfolio. Hence before you decide to invest through mutual funds or into equity directly, make a self-assessment of the target amount that you are aiming at. Also keep an eye on your risk appetite, emergency fund and health insurance.
In this article, you can find the pros and cons of investment into direct equity and mutual funds. Read on, to decide on your investment strategy.
- Risk Management: Direct investments into equity guarantees for higher risk when compared to investment through mutual funds. Mutual funds combine investment of a large number of investors and handle it as one big pool of money. Not much knowledge is required from the investors’ side, except for the due diligence on selecting an appropriate fund to invest, in-line with their requirements. It requires less effort, less time and less specialized knowledge to get returns from mutual funds when compared to direct equity investment. Fund houses have a full fledge research department to research on all the companies that they will be investing on. But for an individual investor, it would be not easy to get a full-fledged view of all the scenarios of the company, thereby increasing the risk on investment.
- Portfolio diversification: This is a major drawback with investment directly into equity. Diversification is not easy for an individual investor. Choosing a good equity share requires broad understanding of the economy, sectors and the company itself. Putting all your money in just a few stocks puts you at higher risk, should even one of those stocks decline. On the other hand, mutual fund manages your money by diversifying your investment into various stocks, thereby containing the overall risk. Also, many fixed income asset types like bonds are simply not available to individual investors.
- Innovative plans: Fund houses host a variety of plans for mutual fund investors. These plans range from Systematic investment plans, systematic withdrawal plans, automatic re-investment plans, asset allocation plans, triggers, pension plan coupled etc. Though these can be performed by individual investors too, it takes in a lot of expertise and self-discipline to implement the same into your equity investment portfolio.
- Professional handling: Active portfolio management requires expertise, skill and a lot of time to monitor the same. Part time stock picking might seem easy, but this requires full time fund monitoring and management to yield required results. On the other hand, mutual funds are handled by professionals who continuously monitor, buy or sell the stocks in the portfolio, whose only mandate is to manage your funds successfully. Individual mutual fund owners do not have to monitor these stocks, thereby saving on a huge amount of time. Also, market ups and downs are handled by professionals much better than an individual stock holder. There are professional fund managers doing the job of managing your money and hence money seems to be in safer hands, than it would if you would trade directly in equity stocks.
- Investor type (active or passive): Equity investments are good for high risk taking individuals, active investors who are emotionally matured to handle the markets ups and downs and those who have the time to individually and continuously monitor their investment. Equity investments are also good for fulfilling short term goals. But mutual funds are best for first time investors, passive investors and those who do not have a huge appetite for risk and do not have the time and expertise to handle the stocks individually.