The investment in mutual funds and stock can help an individual to earn good return over the time. However, one must consider the risk if someone is willing to make an investment in any of them whether it may be mutual fund or stocks. For higher returns, higher risk has to be taken.
Stocks or Mutual Funds which is the better option?
Stocks are generally riskier than investing in equity mutual funds. The equity mutual funds spread an investment across different industries and sector and thus, it reduces the volatility in the investment. Before investing in either of them, an extensive research must be conducted to pick the right option and safeguard your money. Basically, in the case of equity mutual funds, the experts conduct the research and the funds invested are managed by professional fund managers. It is to be noted that the aforesaid service is charged by the mutual fund house as a part of annual management fees.
However, following are some of the aspects that must be considered before investing in either mutual fund or stocks;
Investing as a novice
In case, you are a new investor who has no experience or little knowledge in the stock market, then he must consider investing in equity investment through mutual funds as the risk aspect comparatively less as compared to stock market. Apart from that in mutual funds investment, a fund manager is also assigned to manage the investments made. There are different types of equity funds and one can choose the best available plan to achieve the financial objectives basing on the risk tolerance level.
This can be better analyzed with an example. For example, one can invest in index funds if he is seeking for a passive investment. It tracks the market index which giving you highest return that match the index. Moreover, the expense ratio is lower than actively managed funds.
Tracking of investment
With an investment in mutual funds, there will be an advantage of having a fund manager who will have extensive experience and expertise in the relevant field. The fund manager will manage all the tasks including picking of stock, monitoring of stocks and allocation of funds. The worries will be less. However, in case of stock investment the aforesaid facility is not available. In stock market investment, the responsibility for picking and tracking of investment will be done by investor.
Risk and Return
As mentioned earlier, equity mutual funds have the benefit of reducing the risk by diversity in portfolio. On the other hand, there is vulnerability in stocks for fluctuations in the market and the performance of one stock cannot compensate the risk of another stock. The investment in equity funds depends on the risk profile. For instance, index funds are considered in case of seeking passive investment offering in line in the index market. The risk aspect is less as compared to sector fund which invests in stock applicable to one sector only. Equity funds such as flexi-cap funds, index funds, sector funds, large cap funds can be chosen basing on the risk and return expectation.
Tax benefit cannot be claimed in case of investment in stocks. However, there is a criteria to get the eligibility for a tax deduction up to Rs. 1.5 lakh per annum under Section 80C. There is also tax saving mutual funds also known as equity linked saving schemes or ELSS. Investing in ELSS scheme will provide double benefit including tax saving and inflation beating return.
The Investing Cost
The investment in equity diversified mutual fund provides the facility to invest in more than 50 stocks. The same protects the investment from volatility of stock market and also reduces investing costs. For instance, a considerable amount of money has to be spend to diversify the portfolio over 50 stocks. However, the same can be done easily if investment is made in diversified mutual fund with low cost. Apart from that one can make an investment of Rs. 500 every month in equity mutual fund through SIP and accordingly can enjoy the average cost benefit.
At least 25- 30 stocks are included in a well diversified portfolio, however, the same would be very difficult task for a investor to do. Investors can get a diversified portfolio if invest on an equity diversified mutual fund and also get a mutual fund manager who manages the funds invested. With the purchase of funds provides the facility to invest in more than one stock. Moreover, one can invest by planning a systematic investment plan (SIP) where small amounts are put upon regularly in a equity mutual fund scheme.
Generally, fund managers decide on the stocks that will be included in the portfolio in case of investment in equity mutual funds. There no need to control the stocks on your own and decide what stock has to be picked which not and the duration of the same. In case of mutual fund investment, there is no exit option for some of the stocks that are mentioned in the portfolio. However, in case of investment in stocks, the stocks will have more control upon investment as compared to the investor who is investing in mutual funds as the investor will decide himself whether to buy or sell stocks.
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 sells decisions himself.
While investing in equity fund, no much time is needed to research on individual stocks. The fund manager looks after all of the investment and the research team picks the correct stock for investment. However, important parameters including AMC track records, fund portfolio, asset management and style of investment of the fund manager must be checked prior to investing money in equity fund.
With an intention of long term investment, one can invest in both stocks and equity funds. However, buy and hold strategy must be followed in case of equity funds to accomplish the long term financial goals. Apart from that, in case of stock exits at the right time is also crucial.
With the above discussion and analysis, we can see that investment in Mutual Funds much better option than investing in stock for long term investment as it is less risky than the stocks investment.
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