Should you directly invest in stocks or should you go for mutual funds that have a significant exposure to equities? The answer depends on a lot of things like the amount you want to invest, the risks you are willing to take, the returns you are expecting and your knowledge of the markets. Let us take a look at each of these aspects in detail.
- Investment amount
You don’t need a large amount of money to invest in mutual funds. You can start SIPs with as little as ₹500. This is because mutual funds pool money from a large number of investors and invest in equities of various companies and other securities. However, in the case of stocks, usually a larger amount needs to be invested, in case one wants to invest in a diversified portfolio of stocks of different companies. Further, buying just one share of a single company may not give many benefits in terms of returns or rights accrued, so the amount to be invested may have to be increased, especially if one considers the market price of a well performing stock.
- Risk appetite
When it comes to stocks, the investor is considered as part owner of the company. This means that when the company is doing very well, the shareholder reaps benefits. But when the company is not doing well, the prices of stocks can go down and lead to short-term losses to the shareholder. In the case of mutual funds, the risk is relatively lesser as the money is not put into just one company.The investment is diversified into securities of various kinds and a fund manager usually makes these investments on behalf of the investor in order to maximise returns and minimise risks. The diversification in itself is a risk mitigating factor.
- Knowledge of markets
When an investor buys stocks, he/she will have to closely track the developments in the stock market to make decisions whether to hold or sell the stocks. The investor has to be alert to even the intraday fluctuations in the markets to make intelligent calls regarding buying and selling of the stocks to maximise returns. In the case of mutual funds, the fund is managed professionally by a fund manager of the asset management company. The company charges the investor a small fee for such services. The investor, therefore, need not be an expert on markets. However, this does not discount the need for research to reap the benefits of investing in mutual funds.
- Returns
If one is a keen observer of the market and knows when to enter and exit, then stocks can provide good returns. But it requires time and expertise. Mutual funds can be a combination of equity and securities or just securities. The mutual funds with a higher exposure to equities, will give a higher return compared to the mutual funds that invest only in bonds and other such securities, but they will also have a slightly higher risk. This risk however is less compared to investing in shares.
- Additional costs
In the case of mutual funds, most asset management companies charge a fee for various services provided. The rate varies from firm to firm and scheme to scheme. In the case of stocks, there are no extra costs, but you may still have to pay brokerage and various charges for buying and selling frequently.
6.Tax savings
There are no tax benefits of investments in stocks. The dividend received is also taxed under the head - Other income. In the case of ELSS mutual funds where our money is locked for a minimum period of3 years, a deduction under section 80C of the Income Tax Act can be availed of for investment up to ₹1.5 lakh.
It is up to investors to decide based on their financial goals and risk appetite whether they want to invest in stocks or mutual funds.