Equity is the only asset class that has consistently outperformed inflation and generated real wealth for investors over time. You wish to invest in equities as a young investor. However, there is a serious choice to be made: whether to invest directly in the stock market or through mutual funds.
Let us analyse both investing alternatives on numerous aspects in this post so that we can make a better educated decision.
Management of Risk:
In direct equity, you must be extra cautious when it comes to risk management in your managing portfolio. It's as simple as this:
Before you acquire a stock, do a lot of research on many criteria.
Invest in stocks from a variety of industries and capitalization levels, such as big, medium, and small-cap. This will help you diversify your risk across several businesses and industries.
Fix investment caps per-sector and per-stock to minimise over-exposure to a single sector/stock.
The fund manager is in charge of risk management in mutual funds. When you invest in a mutual fund, you are purchasing a basket of at least 40-50 equities spanning various market capitalizations and industries. A professional fund manager manages your money based on a number of factors.
Returns:
When compared to mutual funds, the return potential of direct stock investments is relatively significant. However, your ability to identify stocks and enter and leave the stock at the proper times will determine your success.
However, your ability to identify stocks and enter and leave the stock at the proper times will determine your success.
Mutual funds aren't known for their sky-high or multi-bagger returns. Because the portfolio is diversified by the fund management to lessen risk. The basic aim is to outperform the benchmark while taking the fewest risks feasible.
Time and effort required:
If you want to invest directly in the stock market, you must first accomplish the following:
Invest in certain classes to learn about equity investment, stock markets, and other related topics.
Invest in certain classes to learn about equity investment, stock markets, and other related topics.
Keep up with the latest news in the economy and business.
Every month, take some time to analyse the performance of your investments.
Create a depository and trading account.
The time and effort required to manage mutual funds is much less. The majority of information on scheme performance and risk criteria may be found on the internet. You might begin by investing in several well-performing schemes with a proven track record. You can review the schemes later, once a year, and make any required modifications.
Size of the Investment:
You can acquire shares of your selected stock in multiples of 1 share in direct equity. You must keep in mind that the share prices of high-quality firms might be quite expensive. So, depending on how much money you have to spend, you can acquire a few shares in any firm you choose to invest in. Don't fall into the trap of buying penny stocks. Prioritize quality over quantity.
There is no such issue with mutual funds. You can invest as little as INR 500 in any plan. You may easily adjust this amount each time you make a new investment based on your monthly excess.
Allocation of Assets:
Asset allocation is a powerful and systematic technique to lower your portfolio's risk. You should remember to invest in debt routes separately while making direct equity transactions (bonds, fixed deposits, etc.). This is to keep an appropriate balance between high-risk and low-risk assets.
It is quite simple in mutual funds. You can also invest in debt and commodities funds (for example, gold funds). They aid in the diversification of your overall
investment across multiple asset classes. You might also put your money into asset allocation funds. Depending on the status of the market, these funds handle asset allocation automatically.
Volatility in the market:
To manage turbulent equities markets, you'll need a good method and the right temperament. You can set a stop loss on your assets and set aside some cash to invest if the market falls below a certain level. Above all, you must maintain your trust and conviction in your investment decisions.
When it comes to mutual funds, you can rely on your fund manager's expertise to make the best investing decisions. All you have to do now is ignore market fluctuations and stick to your SIP.
Cost:
In direct equity, you must pay brokerage, Demat costs, securities transaction tax, and GST when buying or selling stocks.
A fund management fee is charged on mutual funds. You pay it in order to have a professional fund manager manage your money for a very low fee. Furthermore, if you purchase direct plans, you will save money on agency commissions, lowering your overall cost.
Tax Advantages:
The tax treatment of equities mutual funds and stocks is nearly identical. Under Section 80C, however, you can claim a tax deduction of up to INR 1.5 lacs if you invest in Equity Linked Savings Schemes (ELSS). Stocks do not provide this benefit.
What should a young investor prefer, in our opinion?
Both solutions, as we can see above, offer advantages and disadvantages. However, as a young investor, we believe that mutual funds may provide a good basis for your investing portfolio. As you gain experience with equities as an asset class, you may want to investigate direct investing to take advantage of rare possibilities.
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