Equity Investment vs Investment in Mutual Funds. Which one is better?
Investors frequently struggle with deciding whether to invest directly in stocks or through mutual funds for equity investments. Equity Mutual Funds are institutions that combine investors’ money to invest it in publicly listed stocks.
On the other hand, buying these equities through the stock market is also possible. Direct equity investments have historically been unpredictable; they have resulted in significant returns as well as massive losses for some investors.
This article will learn the distinction between direct equity investment vs investment in mutual funds.
What is Direct Equity Investment?
Direct stock investments have a significant risk of loss but also have the potential to be very lucrative. Before investing in equities, one must thoroughly understand the underlying business and the sector in which it works.
As a result, as an investor, you will need to research the company’s track record, financial performance, managerial expertise, and even external issues like governmental regulations, currency exchange rates, and changes in local and global politics.
You can gain more if you strike the correct balance between risk and return.
What are Mutual Funds?
Companies that offer mutual funds pool money from a variety of investors and save through their offered mutual fund plans. The money gathered is subsequently invested by the fund firms in a variety of financial products to provide significant returns.
Experts administer mutual funds. In essence, you own the units representing the share of the fund you own as an investor. A unit holder is another term for the investment.
The distribution of the investment’s increased value and other revenue is proportional to the number of units owned by the unitholders – provided after any necessary deductions.
Direct Equity Investment vs Investment in Mutual Funds
While direct equity investment offers substantial returns, it is only practical for individuals who consistently understand how the equity markets operate.
Therefore, the mutual fund option is better for people who lack the time or expertise to track and understand equities markets. With regards to your investment in mutual funds, there are some advantages that you get.
From professional management of your money by mutual fund experts to low ticket size where you can start to invest with as low as Rs 500, there are many perks of investment via mutual funds.
Subject to exit loads, open-ended funds permit investors to withdraw their money at the current net asset value (NAV). This also aids in financial planning. When a person invests in shares, he is uncertain as to whether he will be able to sell the shares on the market for a reasonable price or not.
In risk management, an individual may go overboard on a particular share; however, a fund manager will have the risk management guidelines in place there are limits on how much a fund manager can invest in each stock and sector.
When you buy and sell shares before holding them for one year, you end up paying short-term capital gains of 15%. However, the fund manager may keep transacting shares at varying intervals if the investor remains invested for more than one year in an equity fund, his gains are tax-free since STT is already deducted.
Your final decision on whether to invest either in mutual funds or direct equity will depend upon how much you understand the markets and whether you have the time to trade in direct equity or not. If you lack the discipline to operate in the stock market, you should channel your money via the mutual fund route.