Whatâ€™s the best way to invest in stocks? Invest directly or through mutual funds
The best way to invest in stocks depends on you.
Gone are the days when households used to save money in lockers or save money in traditional saving options. Thanks to financial awareness, most households are opting for market-linked investment options like mutual funds and the stock market.
Investing in the stock market has gotten the attention of todayâ€™s generation. The expectation of higher returns is the main reason behind their preference. But with greater returns comes higher risk.
Investing in equities can help build wealth over time and achieve long-term financial goals. There are two main options to invest in the stock market: directly and through mutual funds.
But the real dilemma is choosing the right option. You should know that there is nothing right or wrong. The correct option is the one that is suitable for you.
Letâ€™s compare both ways and see what works better for you.
Best way to invest in stocks – Be Expert
To invest directly in the stock markets, you must have the necessary expertise to make wise decisions. First, you must know about all the technical jargon related to the industry. Secondly, you must know how to:
- To read balance sheet of a company,
- To evaluate stocks carefully,
- Analyse a company,
- Build your investment portfolio and so on.
On the other hand, if you invest through mutual funds, you let fund managers handle your money and make investment decisions on your behalf. Fund managers have the required expertise and experience in the field of investment.
Hence, you can invest directly in stocks if you have the expertise. And if not, mutual funds come to your rescue.
How much time do you have?
Your answer to this question will decide the right path to invest in the stock market.
If you have enough time to learn about the investing world, spend hours on research, company analysis, and stock analysis, then investing in stocks might be the ideal option. You might have to make quick decisions in case of major market movements. So, it is essential to keep that in mind as well. If you can do all this, you can invest directly in stocks.
But if you donâ€™t have enough time, or your time is worth more than all the efforts needed, the mutual fundâ€™s route might be the ideal option.
Do you want to make investment decisions every time?
One of the most popular reasons to invest in stocks through mutual funds is the Systematic Investment Plan (SIP). It allows you to invest consistently without a break. Systematic investments develop a habit of consistent investment without worrying about market volatility.
Alternatively, manual investing in stocks will make you think every time you feel like investing. Some days you wonâ€™t feel like investing, and other days, you might even forget to invest consistently. Also, the market levels might influence your investment decisions. You would want to time the market. But, you might burn your fingers trying to time the market.
So, if you want to invest in the equity market in a disciplined manner and fulfil your financial goals, mutual funds are the correct route.
Do you want a diversified portfolio?
If you want a diversified portfolio, getting exposure to stocks through mutual funds can be the right fit. A well-diversified mutual fund would have more than 50 stocks in its portfolio. This ensures that overall risk is reduced and well-performing stocks nullify the effect of underperforming ones.
However, when investing directly in stocks, you will have to analyse each companyâ€™s stock which means a lot of effort will be needed to build a diversified portfolio. Most investors buy only a few stocks and find it overwhelming to manage them well. Hence, they tend to get out of the game early.
Only a few investors will hold a stock for 15 years. In the event of huge gains, they sell their holdings to enjoy gains. In the event of losses, most investors will sell and get out of a stressful situation.
So, if you wish to invest and stay invested for years while enjoying the advantage of diversification, you know which way to go.
Costs are also important
All funds have a specific expense ratio, the annual charge charged by the fund house. It is expressed as a percentage and depends on the fundâ€™s assets under management (AUM). Normally, these expenses are subtracted from your returns.
And these expenses depend on various factors, such as whether the equity fund is an actively managed or a passively managed fund, and if it is an actively managed fund, is it managed by a star fund manager? The expense ratio also depends on the investment option: regular or direct option and the fund size.
Suppose you have invested Rs 30,000 in a fund with an annual expense ratio of 1%. Youâ€™ll have to pay Rs. 300 to the fund house to manage your funds. You donâ€™t directly pay it, but it forms a part of the fundâ€™s return. The expense ratio is subtracted from the fundâ€™s return.
Alternatively, if you are investing in stocks directly, you have to bear expenses such as brokerage charges while buying and selling shares, transaction charges and depository participant charges.
If you are actively trading in the stock market, you might have to bear various costs.
Do you want to save tax and build wealth at the same time?
You can get tax-saving benefits (under section 80C, investment amount up to Rs 1.5 lakh) if you invest in Equity Linked Savings Schemes (ELSS), a type of equity mutual fund. However, you do not get such benefits when you invest directly in the stock market. So, this can be another reason to choose mutual funds.
Investing in equity mutual funds has pros, and so does investing directly in the stock market. Investors with more risk tolerance, time and expertise in the stock market can manually invest in stocks. Investors with less time and expertise may invest in mutual funds. Hence, no option is right or wrong. The one that fits your needs is perfect for you. However, a financial advisorâ€™s assistance can help you plan your finances better.