Mutual Funds or Direct Stocks: Which is a better investment fit for you?

If you are new to investments and do not have much idea about risks and returns, mutual funds can prove to be a better option than direct investments in the stock market.

Mutual funds offer a wide range of options in terms of asset classes to their investors. For example, you can invest in equities, debt, gold, etc. through mutual funds. The stock market index has also been skyrocketing for a while now. Direct investment in stocks also offers an opportunity to bag phenomenal returns.

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So, if you’re wondering which one is a better investment avenue for you, here are some crucial pointers that can help you make an informed decision.

Are you a new investor?

If you are new to investments and do not have much idea about risks and returns, mutual funds can prove to be a better option than direct investments in the stock market. A mutual fund also allows you to invest in instalments through a systematic investment plan (SIP). You can also choose different types of asset classes to invest your money in, depending on your financial goals, returns expectations and risk tolerance. Mutual fund corpuses are managed by highly skilled fund managers who can make better investment decisions during a volatile market. Direct stock investments can be highly risky for a new investor as a wrong decision can easily cost significant losses to the investor.

Do you have sufficient time and expertise to manage risk and ensure a good return?

Do you have sufficient time to look after your investment portfolio? Can you effectively manage the risk when the stock market is volatile? If your answer is ‘no’ to either or both of the above questions, you might want to stay away from direct investments in the stock market and prefer top-rated mutual funds to invest your money in. On the other hand, if your answer is ‘yes’ to both the questions, then the stock market can unfold ample opportunities for you to earn an attractive return.

While investing directly in the stock market, you need to dedicate sufficient time to study the market trends and manage the risks to ensure a higher return. If you invest in a mutual fund, the fund manager will take care of the risk management in the scheme and could provide the best return in all types of market conditions.

Want to diversify across different asset classes?

As mentioned above, if you are looking to invest in different types of asset classes like equity, debt, and gold, mutual funds could be the best option for you. Direct stock investments give you exposure only to one asset class; thus, you may miss the diversification benefit available under the mutual fund platform. In mutual funds, you also get a chance to select the investment type as per the time horizon in sync with your financial goals.

For example, you can invest in liquid or short-term debt funds if you want to invest for the short term, you can invest in equity funds for the long term and equity-linked savings schemes (ELSS) for tax deduction benefit up to Rs 1.5 lakh in a financial year under Section 80C of the I-T Act. Direct stock investments do not have any tax deduction benefits.

Do you have expertise in stock analysis?

If you have expert knowledge in selecting the right shares as per your risk appetite (i.e. independent knowledge and not just expert advice or hearsay), direct stock investments can offer you great returns. However, you should ideally be aware of equity research tools like technical and fundamental analysis and should always stay updated with news related to your stocks. You don’t need to be an expert to invest money in mutual funds. However, basic knowledge could be of great help. A mutual fund may not offer you a multi-bagger return like the stock market, but it can provide you with a decent return with lower chances of losses if you invest smartly.

What should you do?

Mutual fund investments usually suit all kinds of investors, even those with a low-risk appetite. You may choose the type of mutual fund scheme(s) that are aligned with your financial and diversification goals. Direct stock investments are meant for those who understand it well and are ready to take the required risks. You may also choose both mutual funds and direct stock investments depending on your knowledge about the stock market, return requirement, risk appetite, diversification needs and availability of time to manage your investments.

(The writer is CEO, BankBazaar.com)