Where should we invest our money for the long term? And where can we get better returns which can beat inflation?
The answer for both the questions is the stock market.
Once you decide to invest in the stock market, you have got two options. Option one is to invest directly in the stock market while option two is to invest through mutual funds. Each of the options has got its own pros and cons. Depending upon your requirement and situation, you need to choose the right option.
Knowledge and expertise
Investing directly in the stock market definitely demands a good amount of knowledge and expertise. You should know how to read a balance sheet, analyse a company, choose a right company to invest, analysing the sectoral trends, constructing a portfolio and stock valuation.
If you are comfortable doing all these things, then you have qualified the first criteria to invest directly in stocks. If you are not comfortable doing all these things, then you can opt to invest through mutual funds.
There is a fund manager in mutual fund who is an expert in equity investments. He, along with his team of analysts, will take care of investing in equities. As these fund managers are handling huge money, they do sophisticated research, buy research reports from various economic research bodies and directly interact with the management team of the company before making an investment in a company. It is not possible for an individual investor to do all these things.
Are you a time-rich person? If you have answered yes, then you can think of investing directly in stock market. Doing stock market analysis and research, market watch, portfolio review, demands a lot of time. Also as a direct stock market investor, you should have access to the market anytime. At times, there may be some sudden news or major stock market movement. Because of that you may need to make some investment decisions immediately. You need to react on time on those occasions. Investing directly in stock market is a time-sensitive game.
If you are not a time-rich investor, then you can choose the mutual funds route. Here you will be spending very minimal time, but you will get almost similar returns.
There are two set of investors. One set of investors will invest in the stock market to make money. There is another set of investors who will also claim that they are in the market to make money but actually they are in the market because it emotionally engages them. When you invest directly, it also gives you a thrill. You will feel happy when the share you have selected has gone up. There will be a sense of achievement when you sell a share at profit. This is what I call emotional engagement. Instead of investing to make money over a period of time investors, they invest directly for the kick or thrill of emotional engagement. Remember, you need to be rational when it comes to money management. If you are emotional, that will spoil the entire game.
Based on these parameters, you can choose between investing directly in stock market and investing through mutual funds. If you are considering these parameters, you will break the records in the stock market. On the other hand if you are not considering these parameters, you will break yourself in the stock market.
Ramalingam Kalirajanis director & chief financial planner, Holistic Investment Planners . Extracted from Tax Guru