When people start looking for investment options, they comes across many options like real estate, bonds, gold, stocks, mutual funds, crypto-currencies and many more. In most cases people decide their investment instrument based on their goal, understanding of instrument and risk appetite. But if someone decides to go for equity investment then in most cases they have two options Stocks and Mutual Funds. Here again selection mostly depends on our personal understanding, goal and risk taking ability and at some extent your age, financial situation and other savings.
Let’s go in details of Stocks and Mutual Funds and try to understand its features and based on those factors you can make an informed decision.
What is Mutual Fund and How I can Invest:
At first let’s talk about Mutual Funds. This investment instrument should be your initial step in equity market if you are new and you are not aware about stock market because going and investing directly investing in stocks by yourself and without having proper knowledge and experience is just like playing in a casino, you can sometime make money but soon you will lose all your capital. Here it doesn’t mean that stock market is bad it means that your knowledge and experience was inadequate.
Mutual Fund is professionally managed by an Investment Manager usually run by Asset Management Companies (AMCs) that allow an individual, group of people and institution to make a pool of capital and then this capital goes in buying securities and other financial instruments. Here we are focusing on Equity so we will consider only those mutual funds those invest directly in equities. There can be multiple types of mutual funds like equity focused fund, debt based mutual fund, gold linked mutual fund, Money Market based fund, fixed maturity mutual funds etc. But for the sake of this article we will consider only equity focused mutual funds.
Now, at the top level funds can be categorized in two categories, open ended and closed ended. In open ended mutual fund anyone can start investment anytime and also they can redeem their investment any time as well but in closed ended funds it can be restricted.
When we start investment in a mutual fund we can have two ways to put money, it can be via a systematic investment plan (SIP) or a lump sum amount. In the case of SIP we have to invest after a specific time period again and again it can be monthly, quarterly, half yearly or annually. And in case on lump-sum investment, money goes in fund in a single shot.
Mutual funds can hold any number of scrip in its portfolio it can be 10, 20 or in some cases 50+.
The fund manager gets fund from all investors and he/she buys on behalf of investors and in return investors gets units of mutual fund on a certain NAV (Net Asset Value). NAV of a mutual fund depends on value of stocks it holds. If price of those stocks goes up, NAV goes up and when prices of stock go down NAV also goes down and investor can get more units for investment amount. The fluctuation in NAV is the reason that most financial advisors tell their client to go via SIP way so that they can average out their investment and in long term they can make profit.
Mutual funds generally give 10% to 18% on an average and it can vary widely in some cases it can go in negative and sometime it can be more than 50%, but those are very rare event. On a conservative side you can expect a CAGR return of 10-12% in a longer term like 10 Years or 20 Years. Also if you go for a longer duration in mutual fund you will get advantage of compounding which can very easily multiply your capital investment. Investing in mutual fund is very convenient and relatively carries less risk as compared to a novice person directly investing in stocks. Asset management company charges a little fee on your investment known as Expense Ratio, these fee are very small but if you have choice to select a Mutual Fund of less expense ratio you can go for that provided that you happy with both mutual funds.
What is Stock Market and How I can Invest:
Now we will talk about direct investment in stocks on any share market. In share market you open your account with a broker and putting money in your Demat account (Dematerialize Account), and then you can start buying and selling. It looks very simple and convenient but it can be very risky for new people who lack market understanding and cannot analyse an company properly with multiple studies and parameters on the other hand if you have good understanding and experience then with very little risk you can get very high returns. Direct investing in stock market requires lots of experience and learning.
A new person is not advised to go straight and invest in stocks. It should be a gradual process starting from mutual fund then learning stock market basics and execution skill which will be followed by paper trading and then after fundamental and technical analysis you should start with a small capital, even after that you should start with only that capital which you can afford to lose. After years of learning and experience people start making actual return in stock market. Again it is advised to have longer time frame in stock market before going on Intraday Trading or Futures & Options.
On other side of learning and experience, it can be the best instrument to make money from and you can easily double your capital in a year or two. Stock market can help you to meet your financial goals very fast, when other savings are not attractive in case of high inflation then stock market can be the way forward.
Conclusion:
Now to conclude we can say that stock market direct investing is very attractive but it require learning and execution skills. In the case of mutual fund, it is very easy and less risky option for equity exposures but it has relatively decent return as compared to direct share market trading done with proper skill. Now you can decide that which way should go and by putting risk and reward scenario you can select a product or you can choose both.
Disclaimer: The opinions expressed in the Blog are for general informational and educational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.
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