After making an analysis of common myths about the stock market and why you should invest in equities, the next jargon you have to solve is how you can invest, directly in equity or via mutual funds i.e. investing in equity mutual funds versus investing in stocks. You can invest your money either via
Investing in equity mutual funds versus investing in stocks
Knowledge required
In the case of direct equity investment, an investor needs to gather sufficient knowledge about the stock market and the stocks or shares he wants to buy. Many investors invest in direct equity without doing proper fundamental analysis, technical analysis, qualitative analysis, balance sheet, profit and loss account etc. and wait only for one year or two years to get satisfactory returns. Then, in most of the cases, these investors make a loss because of their lack of knowledge and proper analysis.
On the other hand, what intelligent investors do is that they check the fundamentals, technical, qualitative factors of stocks they want to invest and then invest. If you intend to invest via direct equity, you need to read a lot about the stock or company. Always you need to keep a close eye on the stock’s quarterly as well as annual results. You should make an investment strategy in accordance with your risk appetite and goal tenure.
In the case of Mutual Fund
If you invest via mutual funds, you neither need to read anything about a company nor need you to keep an eye on that company and its movement. The only thing you are to do is that just go to any Mutual fund company or a Mutual fund agent. Then the company or the agent will do all the things on behalf of you. You can start investment either via Systematic Investment Plan or lump sum investment. Then, the respective fund manager will invest your money in around 25-30 companies to diversify the risk. Thus, you can lessen the risk factor and generate better returns in the long term.
If you have long-term horizon you may invest in small-cap or mid-cap mutual funds which yield better returns over large-cap mutual funds. You do not need to have a cautious eye on quarterly or annual results of the respective companies. You can pick midcap and small-cap stocks after proper analysis of a stock’s fundamental i.e. debt ratio, compounded sales growth, profit growth, P/E, Balance sheet and Profit & Loss account. Whatever, if you are unable to do anything, the fund manager will manage your investment accordingly.
- Read also: Should I invest in stocks or mutual funds? – Quora
- Read also: Investing in equity mutual funds versus investing in shares
Systematic Investment Plan vs. Direct equity SIP
You can invest in mutual fund either by lump sum amount or on a monthly or quarterly or annual basis. In other words, you can put a lump sum or a little amount every month to invest in the stock market. Many brokerage firms such as HDFC Securities, ICICI Securities, SBICAP Securities also allow a de-mat account holder to invest like SIP via Equity SIP. Let’s make it clear with an example.
Suppose, the price of
Your broker will
But if the share price of Titan company is Rs. 1500/- then your broker
80C benefit
Equity Linked Saving Scheme (ELSS) is a kind of mutual fund offered by several Mutual Fund houses. In this scheme, your money is invested in several companies just like a normal mutual fund scheme. It allows investors to save taxes up to Rs 1.5 lakh under Section 80C of the income tax act, 1961.
Diversification
Diversification means that you have invested your money into many sectors and you are not dependent upon the performance of any one specific sector. You can invest your money into many sectors in accordance with the market capitalization of different sectors such as Banking, Information Technology, Finance, Pharmaceuticals and health, Auto, Petroleum, Power, and Engineering etc. While making an analysis of sectors, you need to
- Market capitalization
- Debt ratio
- Compounded sales growth
- Compounded profit growth
- Return on equity
- Good dividend yield
- Price to earnings ratio
- Balance sheet
- Profit and loss account
Free cash flow statement
Emotional bias
Many experts and analysts suggest that an individual should go with mutual funds. But if you have proper knowledge about the stock market, you may prefer direct equity. Both direct equity and mutual fund yield good returns in the long run. It is a misconception that direct equity is quite a risky job to accomplish. But in reality, it is as simple as the Mutual fund. All you need to do is the proper analysis of the companies you have invested i.e., check out quarterly results as well as annual results. If you have a long-term horizon then you need
You have to be careful to choose stocks. You should buy such stocks which have strong fundamentals, balance sheet, business model, profit &loss account. There are many companies like Titan Company, Asian Paints, Pidilite Industries which have generated more than 400% return during the past 10 years. This kind of performance cannot be expected from mutual funds.
Active vs. Passive Involvement
As we have mentioned earlier that in order to make a profit in the stock market via direct equity you need to
Choosing the best mutual fund or the best stocks for consistent return is quite difficult jargon to solve. But once you have chosen the best one either it is stock or mutual fund, you should continue the investment for a long time. You can choose a systematic investment plan in the case of mutual fund investment and equity sip in the case of direct equity investment. You have to be careful while the selection of stocks. As a smart investor, you should buy that stock which has strong fundamentals, robust earning number. There are many companies namely Titan Company, Asian Paints, Pidilite Industries which have delivered a return of more than 400% during the past 10 years.
No control on Stocks Chosen
After investment in mutual funds, you have no role or control in which stocks your money is to be invested. The fund manager and his research team decide where the money is to be invested. In fact,
Volatility
Usually, mutual funds invest your money into 25-30 different stocks across various sectors. So, your money is distributed among various sectors i.e., the fund is diversified to lessen your risk of losing money. Now, as your risk is divided so as your returns. If one sector
Return
In the case of investment via direct equity, you have to be careful to choose stocks. You should
| Stock | 1-year return | 3-year return | 5-year return | 10-year return |
| Asian Paints | 18.40% | 58.99% | 164.68% | 1400% |
| Pidilite Industries | 37.99% | 109.86% | 288.58% | 2466.15% |
| Minda Industries | -17.60% | 472.90% | 2257.61% | 3688.37% |
| Titan Company | 14.90% | 152.43% | 311.31% | 2009.38% |
Finally,
The bottom line is that if you have zero knowledge about the stock market and unaware of the balance sheet, profit and loss account, and free cash flow then direct equity is a difficult task to solve. You should invest your hard earned money via a mutual fund. If you have proper knowledge but have not got enough time to
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