Most people in India have a perception that investing directly in stocks delivers higher returns. That, however, may not be true always as mutual funds have various advantages.
Mutual Fund Investment: Most people in India have a perception that investing directly in stocks delivers higher returns. Investors tend to put their hard-earned money in such stocks to chase returns. However, one must not forget that returns and risk go hand in hand. Also, there are other factors such as time horizon, goals, diversification and risk appetite which must be considered before investing.
Mutual funds have various advantages listed below that make them a better option than investing directly in stocks:
1. Diversification & Risk: When one invests in stocks directly, one’s portfolio tends to be either over diversified or concentrated which may lead to lower returns or higher risk. However, equity mutual funds, for instance, invest in about 30-50 good stocks that gives an ideal spread to the portfolio and reduces the risk.
2. Professional Management: To invest directly in equities, one needs to dedicate an incredible amount of time studying the macro and micro environment, along with the company-specific fundamentals. “It is almost impossible for a lay investor to understand and factor in all these dynamics on a daily basis. This is where the role of a fund manager is crucial in constructing and managing a mutual fund portfolio. Professional fund managers along with their in-house financial analysts and research personnel are in a much better position to take better investment decisions,” says Amar Pandit, Founder & Chief Happiness Officer at HappynessFactory.in.
3. Variety of Schemes: Mutual funds offer a wide range of schemes that cater to investors with different investment time horizon, needs/ goals and risk profile. For instance, for short-term goals, one can opt for short-term debt funds or liquid funds. For long-term investment horizon, one can invest across different market cap funds, i.e. equity large cap, mid cap, small cap, across sectors i.e. infrastructure, pharma etc.
“While it is clear that investing in mutual funds is better than investing directly in stocks, one should also have an investment strategy to invest in mutual funds. One of the best investment strategy is to set aside and save a portion of your monthly income and start fixed monthly investments – SIPs (Systematic Investment Plan) – in mutual funds. This helps in cost averaging in the long term as your SIP continues in the bull as well as the bear markets,” informs Pandit.
Investing through SIP not only helps in cost averaging, but also inculcates the habit of regular saving and investing towards your goals. It is possible to start SIP even when you are starting off your career and have smaller amounts to invest.