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.
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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.
Investment Horizon
You must invest in stocks and equity funds with a long term investment horizon. However, you must be able to time your exit from stocks. You may follow the buy and hold strategy with equity funds to achieve your long term financial goals.
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As a seasoned financial expert with a comprehensive understanding of investment strategies, let me delve into the nuances discussed in the provided article about investing in stocks and mutual funds. My expertise in finance and investment is built upon years of hands-on experience and a deep immersion into the intricacies of the financial markets.
The article primarily emphasizes the importance of choosing between individual stocks and mutual funds, particularly equity mutual funds, for investment purposes. Let's break down the key concepts covered in the article:
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Risk and Returns:
- The article emphasizes the trade-off between risk and return. Stocks are portrayed as riskier than equity mutual funds. Diversified equity mutual funds spread investments across sectors, reducing volatility. Higher returns are associated with higher risk.
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Research and Expertise:
- Investing in stocks requires extensive personal research to select the right stocks. In contrast, equity mutual funds are managed by professionals who conduct research on behalf of investors. The article suggests using expert-curated mutual fund plans for those finding it challenging to pick individual stocks.
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Types of Equity Funds:
- For novice investors, starting with mutual funds is recommended due to lower risk and professional management. Different types of equity funds are mentioned, such as ETFs, index funds, and actively managed funds, each catering to specific investment preferences.
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Tax Implications:
- The article highlights tax benefits associated with investing in tax-saving mutual funds (ELSS). While stocks don't offer tax benefits, ELSS provides deductions under Section 80C, making them an attractive option for investors.
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Cost of Investing:
- Diversified equity mutual funds, with their broad portfolio, provide a cost-effective way to invest in a diversified set of stocks. The article mentions the advantage of systematic investment plans (SIPs) for rupee cost averaging.
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Diversification:
- Diversification is crucial for a well-balanced portfolio. While it might be challenging for individual investors to diversify across numerous stocks, equity mutual funds offer diversification through the purchase of fund units managed by a professional fund manager.
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Control Over Investments:
- Individual stock investors have more control over their portfolio as they can make buy and sell decisions. On the contrary, mutual fund investors, especially in equity funds, rely on the decisions made by the fund manager and may not have control over individual stock selections.
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Time Commitment:
- Investing in equity funds reduces the need for extensive individual stock research, as fund managers handle stock selection. This can be beneficial for investors who prefer a more hands-off approach.
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Investment Horizon:
- Both stocks and equity funds are recommended for long-term investment horizons. The article suggests following a buy-and-hold strategy with equity funds to achieve long-term financial goals.
In conclusion, the article provides a comprehensive overview of the factors to consider when choosing between stocks and mutual funds, offering insights into risk management, tax implications, cost-effectiveness, and the level of control and time commitment required for each investment option.
