The debate on whether one should invest in mutual funds or stocks is an age-old one. In this article, we have explained the differences of investing in the two instruments, and how to choose one over the other.
Whenever you open any business magazine or television channel, you will see people recommending mutual funds to investors. On the other hand, you will also find direct investment in stocks being recommended by many technical analysts. So, as a retail investor, where should you invest your hard-earned money? The next section will try to unravel some of the finer points.
Which is the Better Option?
Mutual funds have provided great returns to investors over the years, and so have stocks. But, if you are a person who does not have much knowledge of the stock market, then the former might be the right investment option for you. All those people who are interested in the markets, but do not have the time to keep a track of them and manage their investment portfolio, should also go for these instruments.
Direct stock investing is for those who are professional traders. These professionals have the technical knowledge and can predict the future price levels based on intensive research. So, for people without a background or the knowledge of the stock markets, it can be extremely risky. Mutual fund companies on the other hand have a qualified, experienced, and talented team of experts and technical analysts who take wise decisions, and invest the unit holder’s money in high-gain stocks as well as those with medium gain but less risk.
These managers invest the pooled money in stocks of various companies across sectors of the economy such as banking and finance, automobiles, aviation, telecom, infrastructure and so on, so that they can average out the risk, when a particular sector underperforms the broader market. Moreover, investments are made at prices which are attractive to make an entry so that unit holders get a good benefit.
Mutual funds are of different types-high-risk, medium-risk, and low-risk. Some of them invest in large-cap and mid-cap stocks, while others invest in small-caps which have a better future. There are also the diversified funds which invest in large-cap as well as mid-cap companies. You have the freedom to choose a fund as per your needs, financial strength, and risk taking capabilities. After that, you do not need to keep a track of the markets, and yet, get better returns on an annual basis. A good mutual fund can easily provide returns in the range of fifteen to twenty-five percent annually.
Before investing, you should educate yourself about the way they function. Do your research and find out which asset managers have provided consistent returns over a period of time such as three or five years. Especially, check their performance in times of crisis such as the recession of 2008. You can also consult a financial advisor to help you with your selection. Considering the increasing popularity of these funds, many companies are coming up with exciting new offerings. Governments across the world have also relaxed many norms regarding these investments to attract more people towards them.
Direct stock trading can provide higher returns than mutual funds if done in a well-planned and strategic manner; however, is also the more riskier of the two. Therefore, the retail investor can get more peace of mind with the latter for its advantages discussed above.
Disclaimer: This article is for reference purposes only and does not directly recommend any specific investment choices.