Mutual funds collect monies from multiple investors and invest it in different asset classes. These are professionally managed and you need to pay an annual management fee. You may buy mutual funds either directly or through an advisor.
On the other hand, when you acquire equity in the stock market, you acquire ownership of the shares issued by public companies. Your shares represent a certain claim on the asset and liabilities of the organisation.
A common but a difficult decision that you may often need to make is whether to invest in mutual funds or direct equities. Unfortunately, it is impossible to say if one is better than the other is.
Here are six criteria that may help you make an accurate decision.
- Time available to track performance
You must not base your investment decisions on tips or advice. In addition to these, it is crucial you do your own research and analysis to make your decision. Furthermore, it is very important that you regularly monitor and track the performance of your portfolio. If you have time to analyse equities and regularly monitor your investments, direct equities may be a good option. Another factor is whether you have the necessary technical skills to execute detailed analysis of stocks, companies and markets.
- Surplus amount available for investing
When you invest in direct equities, one way to mitigate market volatility risk is through diversification. However, this requires having a higher investible surplus. To spread your risk, you need to invest in 10 to 12 stocks to benefit from economies of scale, which requires a huge investible capital. When you invest in mutual funds, the managers have a large corpus to invest and mitigate the risks.
- Investment philosophy
If you want to invest in a few stocks that you comprehend, direct equities are beneficial. However, if you want to invest in the larger market themes, mutual fund investments are better. For example, you want to invest in the broader market index or in banking stocks. An index fund or a bank fund is advisable in such situations. Mutual funds are recommended if you want to invest smaller amounts in larger themes.
- Build long-term wealth
To build long-term wealth through equity Systematic Investment Plan (SIP), stock selection becomes very important. An easier option is to start a SIP in a diversified mutual fund for wealth creation in the longer period.
- Meet financial goals
Investment decisions are not isolated and often in accordance with certain financial goals. If you want to ensure your long-term goals are achieved then mutual fund investments are a better option. Long-term financial objectives are achievable through proper risk management. Mutual funds have a natural way to mitigate risks, which helps you achieve your long-term goals.
- Tax benefits
This may not be an important factor when your investment amount is small. However, as the amount increases, tax efficiency becomes an important consideration. When you invest in mutual funds or direct equities, capital gain tax implications are not different. Both these instruments have zero long-term capital gain tax and 15% short-term capital gain tax. However, taxation on dividend incomes is different. If the dividend on equities exceeds INR 1 million, you are liable to pay tax whereas there is no such condition on equity funds dividend income. Additionally, when you invest in Equity-Linked Savings Schemes (ELSS), the investment amount is eligible for tax benefits under Section 80C of the Income Tax (IT) Act.
Investing requires deep understanding and skills. There are multiple variables with frequent volatility. It is very difficult even for seasoned investors and professionals to time the markets correctly. Furthermore, managing and monitoring your equity portfolios is a tough and cumbersome job, especially in the constantly changing market dynamics. If you do not have the expertise and the time to regularly monitor the stock markets, direct equities are not advisable. You may not be able to earn higher returns but there is also the risk of losing even your capital investment.
In this case, it is recommended you buy mutual funds online and let the experts manage the investment portfolio. Mutual funds ensure your peace of mind because fund managers are trained and experienced professionals who deliver exceptional returns. If you want to enjoy comfort while investing, choosing a mutual fund is advisable.
The aforementioned criteria should help you make your decision. Buy mutual funds online today and see how your money works for you.