Mutual funds vs Direct Equity Investment: What should a young investor prefer?
In this post, let us compare both investment options on various parameters to take a more informed decision.
- Do lots of research on various parameters before buying a stock.
- Buy stocks across sectors and capitalization like large, medium, and small-cap. This will help spread your risk across companies and sectors.
- Fix per-sector and per-stock caps on investment to avoid over-exposure to a single sector/stock.
In mutual funds, risk management is taken care of by the fund manager. When you buy into a mutual fund scheme, you buy into a basket of a minimum of 40-50 stocks across caps and sectors. Your money is managed by a professional fund manager on various parameters.
You don’t expect sky-high or multi-bagger returns in mutual funds. Because the fund manager diversifies the portfolio to reduce the risk. The primary goal is to generate a higher return than the benchmark, with the least possible risk.
Time & effort:
- Invest in some courses to learn about equity investing, how stock markets work etc.
- Read up on the day-to-day developments in economy & business.
- Spend some time every month to review the performance of your stocks.
- Open a Demat & trading account.
In mutual funds, the time and effort involved are comparatively significantly less. Most of the information about scheme performance & risk parameters is available online. You can get started with some well-performing schemes having a decent track record. Later, once a year, you can review the schemes and make the necessary changes if needed.
In mutual funds, there is no such problem. You can invest in any scheme starting as low as INR 500. You can easily change this amount every time you make a new investment as per your available surplus for that month.
In mutual funds, it is relatively easy. You also have a range of debt & commodity funds (for example, gold funds). They help you diversify your total investment into various asset classes. You can also choose to invest in asset allocation funds. These funds automatically manage the asset allocation depending on the state of the market.
In mutual funds, you can trust your fund manager’s skills to make the right investment moves. You just need to ensure that you ignore market movements & continue with your SIP.
In a mutual fund, there is a fund management charge of around 1-2%. You pay it to get a professional fund manager to manage your money at a very reasonable cost. Further, if you buy direct plans, even this cost gets reduced as you save on the agent commissions.
Our verdict: What should a young investor prefer?