Stock market or mutual funds – You keep on reading stories about the mind-boggling growth achieved by some of the stocks in the share market in a short period. Many want to find the next big break that can help in financial growth but do not know where to start. There are two routes with which you can invest your money in the equity market – stock market and mutual funds.
With mutual funds, you can invest in a variety of asset classes like equity, debt gold, etc. On the other hand, the stock market allows you to make a direct investment in companies and grow your money in line with the growth of a company that you have invested in.
Many want to know the right route to invest – stock market or mutual funds. We are going to analyze the two on various parameters so that you can make an informed choice about what is right for you.
Here is how you can decide between stock market and mutual funds:
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- Level of education and awareness
Your level of experience will play an important role in making the right choice between mutual funds and stock markets. If you do not have a good education about how the stock market works, it is better to opt for a mutual fund.
As a mutual fund would have an experienced fund manager who will make the investment decisions on your behalf, it is better to opt for a mutual fund for your investments in the early stages of your investing journey.
- Asset classes
If you are only looking at investing in the equity market, you can opt for making direct investments into various stocks that are available. However, if you want to diversify your investments into various asset classes like equity, debt, gold, etc., you should look at mutual funds as your default choice.
Mutual funds also allow you to make investment decisions based on your goals and investment horizon. You should only opt for a stock market if you do not want to diversify and utilize the benefits offered by other asset classes.
- Risk and return
You should consider your risk appetite and return expectations in deciding between mutual funds and the stock market. There is a comparatively higher risk in making direct investments into stocks rather than opting for a mutual fund.
There is a possibility of a higher return in direct investments provided you understand the risks. In the case of a mutual fund, as the investment is made in a variety of stocks and asset classes, the risk is comparatively lower. The returns are also lower in the case of a mutual fund as the losses are compensated for by other investments under the same mutual fund.
- Stock analysis
You should consider your ability to do stock analysis to pick the right winners. Your picks should not be based on the recommendation of friends but a solid analysis of the present and future performance of a company. You should know how to do the technical and financial analysis so that you can make the right choices. However, if you do not know how to do such an analysis, it is better to stick to mutual funds so that you have the fund managers who can make the right decisions for you.
You would need some analytical bend of mind to select the right mutual fund but you have indices like past performance, charges, future potential among others to select the right mutual fund for you.
Read also: Why should one invest in Mutual funds?
- Tax benefits
Several mutual funds allow you to take tax benefits by investing in tax saver equity-linked savings schemes (ELSS). On the other hand, there are no tax benefits when it comes to investing in the stock market. For instance, you can claim a tax deduction of INR 1.5 lakh in a financial year under section 80(C) of the Income Tax Act.
If you are looking at making investments and want to make use of the tax-saving options available, you should opt for mutual funds as compared to making direct investments in companies.
These are the top five factors that you should consider when making investments in either mutual funds or the stock market. If you have good knowledge about the financial and technical performance of stocks, you can go for direct investment. In case you do not have much knowledge about analysis and are just starting, it is better to go for mutual funds to start with.