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With mutual funds, an investor can follow a disciplined approach to investing.
Those graphs, bar diagrams and numbers confuse you, right? Perhaps, they have even kept many of you away from investing your money. Well, there’s no denying that investing in stocks or mutual funds without understanding what they really entail and how things work can be very difficult. For the longest time, people have looked at it as a complex web of numbers, charts and bars, compelling them to look away or look for an easier avenue to invest in. So, at the start of your journey as an investor, be it in stocks or mutual funds, you, just as anyone else, need some guidance.
Let’s help you understand the two terms a bit better before you go about making your investments.
Stocks
The financial instruments that a company issues are known as stocks. They give investors part ownership in the company, and the right to claim profits in the form of dividends. Apart from that, investors also for voting rights when they park their surplus money in an organisation, which allows them to be a part of the key decision-making process. Stocks are also known as shares and equities.
To sell its shares for the first time to the public, a company lists them through an initial public offering (IPO) and allots them to bidders once the subscription period is over. The next step is the listing of these shares on the stock market. Once that happens, you can also place buy and sell orders for the shares allotted to you.
Another important factor to keep in mind is your ability to take risk. Your age, goal and the amount you have determines your risk capacity. Ask yourself if you have other liabilities or family responsibilities. If the answer is yes, then you, probably, shouldn’t take a high risk. Not, at least, until you have understood the markets well enough.
Mutual funds
These are financial instruments where money is mobilised from many people and invested into different asset classes. Mutual funds allow you to own a portfolio, which consists of stocks, bonds or other securities. Owning a share of a mutual fund means owning all the assets of that fund. A diversified portfolio doesn’t give you much trouble, especially if your aim is building wealth in the long run. Profits are distributed among investors per units they have invested in.
Following are the key factors when it comes to investing in either of these instruments:
Financial goals: Stocks are riskier than mutual funds. So, while considering where to park your money, you also need to ascertain your financial goals, which depends a great deal on what stage of life you are in. One easy example is the difference in the financial goals of a college student and a middle-aged family person. So, ensure you have a financial goal in mind before you set about investing.
Diversification: It’s the key to success. Mutual Funds invest in a large number of stocks. So, here there’s excellent portfolio diversification and lower risk. In case a couple of stocks incur losses, due to diversification the impact is negated to a huge extent. When it comes to stocks, an investor usually invests in 10 to 15 stocks, which means, higher volatility. So, conduct an inventory of what you own and allocate your assets accordingly.
Discipline: With mutual funds, an investor can follow a disciplined approach to investing. There are various systematic investment plans (SIPS), which allow an investor to set aside a fixed sum every month, and invest that into the market. With stocks, though there are options for SIPs, again it all comes down to the investor, who has to be well-versed with the market to make the right selection.
Management: Mutual Funds are professionally managed. A fund management team that does a lot of research on stocks and sectors, is available at the disposal of an investor. So, it saves a lot of time for the person investing. When it comes to stocks, an individual investor will have to spend a lot of time researching and understanding the market and the business. Basically, the investor has to end up doing the things that a fund management team does in case of mutual funds.
Tax benefits: With mutual funds, there are schemes that come under section 80C, through which you can claim tax deductions. But there is no such option for stocks.
So, if you are an investor with a flair for research, and like to read up on companies’ financial statements, you can consider investing in stocks after making your own decision. Though the returns are higher, so are the risks. On the other hand, if you don’t want to go through the hassles of research, and don’t have a problem with fund managers managing your money, then mutual funds are the right option for you.
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