Given the complexities of investing, it can be overwhelming for investors to decide what type of investments to make. The Indian market offers a variety of options for investing in equities, two of the most popular equity investing options are stocks and mutual funds.
Both stocks and mutual funds have advantages, but which one to choose for your financial needs? Investors must understand the difference between investing directly in equity and through mutual funds to make the right decision.
Keep reading as we discuss the differences between investing directly in equity and investing through mutual funds.
What are Direct Equity Investments?
Direct equity investments involve buying shares of individual companies on the stock market. Investors can choose to invest in stocks themselves or through a Portfolio Management Services (PMS) provider. PMS providers provide tailored investment services and personalized financial advice.
When investors buy shares of an individual company, they are exposed to risks associated with that particular company’s performance. Direct equity investments also require considerable research and analysis on the part of the investor before investing, making them best suited for those with some knowledge about the markets and/or access to expert advice.
For example, if an investor owns shares in a particular company, it is important to track the performance of the individual stocks and monitor them regularly to ensure their portfolio remains profitable.
What are Mutual Funds?
Mutual funds are collections of different types of securities that professional fund managers manage. These fund managers use a mix of strategies and investment analysis to determine which type of securities should be included in the fund’s portfolio.
Investors can choose between open-ended mutual funds, closed-ended mutual funds, or exchange-traded funds (ETFs). Open-ended mutual funds allow investors to buy or sell their units anytime, depending on their financial needs. Closed-ended mutual funds, however, have set dates for buying and selling units. ETFs track the performance of an index like the Sensex and Nifty 50 and invest in a basket of stocks based on the underlying index.
Mutual funds offer diversification benefits as each mutual fund scheme invests in multiple stocks or bonds.Fund managers also perform regular portfolio management to ensure the portfolio remains profitable. This means that investors can invest in a diversified portfolio with little effort while relying on professional fund managers to make intelligent investment decisions.
Direct Equity Funds vs. Mutual Funds: Know The Major Differences
Both direct equity investments and mutual funds come with their advantages and disadvantages. So, it is important to understand the differences between these two investments before deciding.
Amount Invested:
In the case of mutual funds, you can start investing with a much lower amount as compared to direct equity investments. For example, you can start investing in mutual funds with as little as Rs 500.
On the other hand, when it comes to equities, the amount you need to invest will depend on the value of the stock. For example, if you decide to buy shares of Tata Motors Limited, a single share will cost you INR 378.50 (at the time of writing this article). A single share won’t give you higher returns, so you must invest in multiple stocks. This will require more money than what is required for mutual funds.
Control:
When investing in mutual funds, you have little control over the investments and depend on the fund manager to make sound decisions. However, when investing directly in equity, investors have greater control over their investments as they can monitor and track the performance of individual stocks and take immediate action if required.
Risk:
Mutual funds offer diversification benefits so that an investor’s portfolio is not exposed to too much risk. Since direct equity investments involve buying individual stocks, investors are more exposed to risk associated with those particular companies than with a mutual fund.
Liquidity:
Regarding liquidity, direct equity investments offer more flexibility as you can sell your shares whenever the market is open. However, this can go both ways because stock prices can also decrease. Mutual funds are more liquid than direct equity investments, as you can quickly and easily redeem your units at any point. However, they come with certain restrictions and redemption policies.
Convenience:
Mutual funds might be the better option if you’re investing, as it takes very little effort to get started. Portfolio Management Services provided by mutual fund houses and online platforms make it even simpler for investors to manage their portfolios with minimal effort. Meanwhile, when investing directly in equity, investors need to study each stock individually and be constantly aware of market fluctuations.
So, What Should You Choose?
Ultimately, the decision depends on your personal goals. Mutual funds might be the better option if you start out with investing as they offer safety, convenience, and a lower entry barrier.
On the other hand, if you want greater control over your investments and don’t mind monitoring them regularly, then direct equity investments may be the right choice for you. It is always recommended that investors should consult with an experienced financial advisor before making any investment decisions. This ensures that their portfolios meet their individual goals while avoiding unnecessary risks.
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