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Should you invest directly in Stocks or Equity Mutual Funds?

Know which will be the best option for you.

Many people want to invest in equities and earn higher returns. But they are not. What is holding back is the unreasonable fear of risk. They believe that equities have the potential to earn attractive returns and at the same time, one can lose all their money. While many people have may experienced, it is not necessary what equity investment is all about.  

What if we say that equity investments, don’t have to be as risky as you think? Mutual fund is less risky and better way to take equity exposure.

So, what is mutual fund?

Mutual funds pool money from different investors, which can run into lakhs, and expert fund managers manage it. Equity mutual fund is a category of mutual fund that invests a major part of their allocation in equities.    

Here’s some of the difference between Mutual Funds and Direct Stocks

You don’t need expertise

Investing in equity mutual funds is easier than direct stocks as you don’t need to have expertise in stock picking. In direct stocks, you need to do a lot of research and track the stock for some time before investing in stocks. This takes a lot of time. You may not have the technical expertise to or the time to research about stocks. If this is the case, then investing in mutual funds may be the right approach for you.

Investing in Mutual Funds carries less risk than direct stocks

When you invest in equity mutual funds, the risk that you are exposed to is less than the risk associated with direct stocks. It is because, first, mutual funds have diversified portfolio, second, equity mutual funds are managed by fund manager. 

Mutual funds have a diversified portfolio with an average of 30 stocks across different sectors. It helps you to contain the risk associated with your portfolio. In case of direct stocks, the volatility of a stock can lead to massive swings in your portfolio.  

Also, the market regulator, Securities and Exchange Board of India (SEBI) has capped the investment in a single listed stock at 10%.

You don’t need a lot of money to invest in mutual funds

Equity mutual fund is extremely easy for retail investors. You can do a one-time investment starting at Rs.1000 or a systematic investment plan at Rs.100 per month. On the other hand, buying direct stocks is extremely expensive especially when the market is going up. Just for instance, if you want to buy HDFC Bank shares, you have to shell out more than Rs.2,000* for a single share. If you want to invest in MRF, the share price is around Rs.54,000*. That may be difficult for a retail investor. However, you can invest in these two stocks easily through equity funds.

Conclusion:

When you are looking to invest in equites, you need to decide whether you want to invest in direct or invest in mutual funds. To summarise, you can ask yourself whether you are okay with the higher risk associated with direct equites or do you have the expertise to invest directly in stocks. If the answer is negative, then equity mutual funds can be a good way to invest in equities.   

If you want to know more about mutual funds, you can contact a financial advisor.

*Data as on 8th July, 2018

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