Everyone wants to earn the jackpot by entering the stock market, but what most don’t understand is that it doesn’t work like that. People in India, in general, have this perception that investing in stocks directly will deliver them higher returns, and they end up putting their hard-earned money in stocks, and in the chase to earn higher returns, they lose all their money. Experts say, what most people, especially newbies, don’t understand is that in the stock market, returns and risks go hand in hand. There are various other factors that also need to be considered before investing in stocks such as goals, time horizon, diversification, and important risk appetite of the investor.

To get the best out of this investment, as an alternative, investors can look at investing in mutual funds. It comes with its own set of advantages and is a better and safer option than investing in stocks directly.

Know how do they differ;

  • Professional Management
    One of the reasons why investing in stocks directly is not a good option, is because the investor needs to dedicate a lot of time studying the macro and microenvironment, along with the company-specific fundamentals. Hence, it is impossible for a non-expert investor to understand and factor in all these dynamics on a daily basis and manage his/her investments. This is where a professional fund manager comes in. With mutual fund investment, fund managers manage a mutual fund portfolio. Professional fund managers along with financial analysts and research personnel make much better investment decisions, at the back end of a mutual fund.
  • Diversification of risk
    While investing in stocks, investors’ portfolio usually gets over diversified or concentrated to one side, which can lead to higher risk or lower returns. On the other hand, with equity mutual funds, one gets to invest in about 30-50 good selected stocks. This way the investor gets an ideal spread to the portfolio and, hence, reduce the risk.
  • Variety of Schemes
    With stock, the investment of a person generally gets narrowed down. However, with the mutual fund, investors get a wide range of schemes catering to different investment time horizon, needs and goals and risk profile of different investors. In the case of short-term goals, investors can opt for either short-term debt funds or liquid funds, at the same time for long-term investments investors can look at different market cap funds, such as equity large, mid, and small-cap, across sectors, for instance in infrastructure, technology, pharma, etc.
  • Type of Investment
    Timing the market, especially while making investing in stocks is one of the main ingredients for disaster. Most people investing in stocks doesn’t know when to put in money and when to leave. Comparatively, one of the best strategies to invest in mutual is to put in money in it monthly and start fixed monthly investments – SIPs (Systematic Investment Plan) – in mutual funds. In the long term, SIP helps in cost averaging as the investor’s SIP continues both in the bull as well as the bear markets. Through SIP, investors also inculcate the habit of regular saving and investing towards his/her goals. One can also put lump sum money in mutual funds, instead of monthly SIPs.