Stocks Vs Mutual Funds! Where to Invest?
Investing in stocks and mutual funds may help you earn
inflation-beating returns over time. You need to consider the amount of
risk you are willing to take before making the investment. For higher
returns, you will have to take a higher risk.
Understanding Stocks and Mutual Funds
Stocks are far riskier as compared to equity mutual funds. The diversified equity mutual fund
spreads your investment across sectors and industries and hence,
reduces the volatility in your investment. You have to conduct extensive
research to pick the right stocks before investing your money. In the
case of equity mutual funds, the research is done by experts, and a
professional fund manager manages your investment. This service is not
free and comes with annual management fees that are charged by the
mutual fund house.
When investing as a novice
If you are a new investor with little or no experience in the stock
markets, it is best to start your equity investments through mutual
funds as not only is the risk comparatively lesser, you also have a fund
manager managing your investment. You also have different types of
equity funds and you may choose the best plan to achieve your financial
goals based on risk tolerance.
For instance, you could invest in ETFs or index funds if you seek a
passive investment. It tracks and replicates a market index giving you
returns that match this index. Moreover, it has a lower expense ratio as
compared to actively managed funds.
Tracking your investment
With an investment in mutual funds, you have the benefit of a fund
manager who has extensive expertise and experience in the field. Whether
it is picking the stocks or monitoring them and making allocations, you
do not have to worry about it. This service is not available in the
case of stock investments. You are responsible for picking and tracking your investment.
Risk and Return
It is already established that equity diversified mutual funds have the advantage of reducing the risk by diversifying a portfolio.
On the other hand, stocks are vulnerable to the fluctuations in the
market, and the performance of one stock can’t compensate for another.
Moreover, you could consider investing in equity funds depending on your
risk profile. For example, you could invest in index funds if you seek a
passive investment which offers returns in line with a market index. It
is less risky as compared to a sector fund that invests in stocks of
only one sector.
You may choose to invest in equity funds such as index funds,
flexi-cap funds, sector funds, ELSS or large-cap funds depending on your
risk and return expectations.
Tax Gains
You don’t get any tax benefits if you invest in stocks. However, you are
eligible for a tax deduction up to a maximum of Rs 1.5 lakh per annum
under Section 80C if you invest in tax-saving mutual funds called equity
linked saving schemes or ELSS. You may invest in ELSS for the
twin-benefits of inflation-beating return and tax saving.
The cost of Investing
You may invest in an equity diversified mutual fund that invests in
around 50 stocks. It protects your investment from the volatility of the
stock market and also reduces the cost of investing. For instance, you
might have to spend a considerable amount of money to diversify a stock
portfolio across 50 stocks. However, you can do this easily if you
invest in equity diversified mutual funds at a much lower cost.
Moreover, you could invest just Rs 500 every month in the equity
mutual fund through the SIP and enjoy the rupee cost averaging benefit.
Diversification
A well-diversified portfolio should include at least 25 to 30 stocks,
but that would be a difficult task for a small investor. With equity
diversified mutual funds, investors can also get a diversified portfolio
which is managed by a mutual fund manager. Buying units of the fund
allows you to invest in multiple stocks. Moreover, you could invest
through the systematic investment plan or SIP where you put in small
amounts regularly in an equity mutual fund scheme.
Control on your investment
In the case of equity mutual funds, the fund manager decides on the
stocks to be included in the portfolio. You do not have control over
which stocks are to be picked and for what duration. As an investor, if
you invest in equity mutual funds, you do not have the option to exit
from some stocks that are in your portfolio. However, an individual
investing in stocks has more control over the investment than an
investor who invests in mutual funds as he makes the buy and sell
decisions himself.
Time
You don’t have to spend a lot of time researching individual stocks if
you invest in an equity fund. The fund manager takes care of your
investment and the research team picks the right stocks. However, you
must check the important parameters such as portfolio of the fund, AMC
track record, assets under management and investment style of the fund
manager before investing your money in the equity fund.
For more information on this, visit TAXAJ
Posted by Aashima
Team TaxaJ
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