Investing in Direct Equity or Mutual Funds, which is right for you ?

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Should I invest directly in stocks or mutual funds, is a question most investors faced with at the time of investing. This decision has become even more significant today, given the uncertain global economic scenario and the volatile markets.

 

A mutual fund is a professionally managed investment, which pools together the resources of individuals and invests in various securities, according to the funds’ predetermined investment objective. There are various types of mutual funds that invest in stocks, bonds, money market instruments, forex, and other financial instruments.


You as an investor can also invest directly in individual stocks & debentures through a trading account with a stock broker. In this active form of investing, you select the stocks to invest in and it is your responsibility to maintain your portfolio.

 

Which route is the best for you is the important question. We at Fpguru.com suggest you to keep the following points in mind before deciding.


Market expertise
One of the most important considerations before investing is the level of market expertise you possess. A mutual fund is a professionally managed fund, which is managed by experts in the industry after carrying out detailed fundamental analysis of stocks and also of the industries and economic scenario as a whole. If you are a more market savvy and risky investor you could invest directly in stocks of your choice and build your own portfolio.


Transaction Cost
Mutual funds have high trading volumes which result in lower percentage transaction costs as compared to the comparatively lower volumes of individual investors. However, mutual funds have their own set of the asset management charges and expenses which are significantly higher than the brokerage and demat charges, incurred on direct investment in equity. Thus is it imperative that you understand the complex fee structure and evaluate the costs associated with both the investment strategies, before investing.


Diversification
Diversification is one of the key advantages of investing in a mutual fund. If you invest in small amounts directly in equity, you will be able to invest in very few stocks as compared to holding units of a mutual fund, which invests in an array of stocks and sectors, thus reducing the overall risk of your portfolio.


Ownership
When you invest directly in equity you have an ownership stake in the companies you invest in, with voting rights which makes their management accountable to you. Whereas when you invest in a mutual fund there is no such investor right as the mode of holding is indirect.


Control
An investor has no control over the stocks a mutual fund invests in, as the investment is managed entirely by the fund managers. This is contrary to investing directly in equity where you can decide which stock to trade in and have absolute control over your investment. Thus it is very important for you to understand the risk and rewards associated with each type of fund and invest in one which is in line with your investment objectives.


If you are well versed with market terminology and have enough time, then you could invest in quality large caps and mid caps after doing qualitative research of course. However, if you are a beginner in investing or do not have the time to continuously track your stock portfolio, we would advise you to invest in mutual funds as the fund management is left to the experts, as investing without doing research or without taking out enough time could result in huge losses.

It is essential that you identify and appreciate your own characteristics as an investor before investing directly into equity or mutual funds. 

Make the right choice!

 

By Riddhi Agarwal

The writer is working with FpGuru.com.

Comments  

 
0 #8 prachi rathi 2012-01-22 09:46
this article was very nice and helpful also i would like to know whether this article is based on some research or not
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0 #7 Parul Malhotra 2011-10-04 06:50
Nice Article Riddhi !!
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+1 #6 nishant chag 2011-09-21 12:47
how come you started writing? oh my god but anyways good article miss cfp
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0 #5 Riddhi Agarwal 2011-09-20 14:05
Thanks everyone!! Really appreciate it.
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+3 #4 Megha A 2011-09-20 10:05
I came across this webside while researching investment options as I was very confused with all the various options available. This article really helped me understand the difference between mutual funds and direct investment, like for someone like me who doesn't have knowledge of the stock market, mutual funds are probably a better option.
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+1 #3 Pratik Gautami 2011-09-20 09:25
very nice article
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+1 #2 Chitra Goenka 2011-09-20 09:03
Thats a super article , especially for the not so market savvy people like me ! Great job Riddhi! Keep such articles coming in !!
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+2 #1 RIKIN SHAH 2011-09-19 10:32
good article sir...even i was confused wether to go with mutual fund or direct equity.. !!
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