Investment is mutual fund is better or should I invest directly in stocks through the stock market. This dilemma often shakes up in mind of many investors.
It is important to understand that every investment platform cannot be best suitable for every investor. Direct stock investment can be highly rewarding for investors having adequate exposure of the market but for a person having no knowledge of stock market can get a shocking reward.
Mutual Fund investment Vs Direct investment in stocks – Comparison
|Parameters||Mutual Fund Investments||Direct Stock Investment|
|Risk involved||Less Risky||Highly Risky|
|Tax exemption||Available with ELSS||No similar tax exemption|
|Portfolio Diversification||Yes||Difficult if the corpus is small.|
|Fund management||By professional fund managers||By investor himself|
|Passive or active investment||Passive investment Active investment||Active investment|
|Demat requirement||Required only for ELSS||Required|
|Investment discipline like SIP||Yes||Optional but difficult for investor to manage|
|Loads and expenses||As per scheme specification. No brokerage if transacted on direct mode.||Only brokerage is payable|
|Returns||Depends on market conditions, Choice of scheme and time horizon||Depends on market conditions, Choice of shares and time horizon|
For which investor category, Mutual Fund is a better investment option:
- The investor who is new and inexperienced should always prefer mutual fund investments.
- The investors who don’t have capacity to bear the volatility of the stock market should invest in mutual funds.
- The investor looking for diversified portfolio should invest in mutual funds.
- The investors who don’t have time and skill to manage their investment portfolio should invest in mutual funds. It is because the investment made by you is managed by a team of experts whose intent is to give you consistent returns over the long term.
- The investment made to fulfill a future financial goal should be in a suitable mutual fund scheme. Mutual funds give you a wide variety of investment options in line of your future financial goals within the stipulated time period. It is good to start with mutual funds before entering in stock investments.
- The investors who recently started their career and wanted to create wealth through systematic investment on periodical basis must invest in mutual funds through SIP.
- The investors investing for a specific purpose like education of their children, buying own house, retirement planning etc. should prefer investing in mutual funds choosing suitable schemes.
For which investors, direct stock investment is a better investment option
A seasoned investor, who has the time and expertise to understand the undercurrent of the stock market, ability to analyze the financial statements and future prospects of companies, having strong control over the emotional and psychological biases and ability to bear losses, should invest directly in stocks. Such investors should have ability to create their own portfolio of stocks. They can earn superlative returns associated with stock investing in comparison to a normal investor.