As I discussed earlier, there are many asset classes to invest our money for beating inflation. Stocks or equities are one of them. One should diversify thier portfolio across different asset classes for sure to avoid any unprecedented circumstances.
Direct Stock Picking:
Let’s first dicuss about direct stocks investing. In this, you will simply open an account with any broker like Groww or Zerodha, there will be thousands of companies which are listed in the NSE (National Stock Exchange) & BSE (Bombay Stock Exchange). One can invest in these companies by doing thier own analysis.
Advantages:
- No need to pay to any mutual fund manager since you are investing directly
- One can pick any stock from any sector which suits our risk profile
- No need to worry about position sizing, we can invest our whole amount even in a single stock if we have faith in the company
- One can exit at any given point without any hiccups
Disadvantages:
- It is hard to diversify our money in 50 or 100 different stocks with little amount.
- Selection of stocks becomes very tricky
- Post selection, at what price point one should enter and exit the stock will be a tough lesson to learn
- One can lose money out of greed and emotion by investing too much in a single stock or by playing with penny stocks
- Everyone will not be coming from finance background, it will be harder for the beginners to understand the fundamental & technical analyis which is necessary in direct stock picking
Mutual Funds:
In layman terms, mutual fund is just a basket of companies. So, one can invest directly in the basket rather than picking the individual stock. For instance, Let’s say, Axis Mutual fund contains 50 companies, there will be a fund manager managing people’s money and tracking the companies, one can start investing in these type of mutual funds even with a very little amount 500/- or 1000/-. Your 1000/- will be going to those 50 companies according to the percentage disclosed by that mutual fund manager. In direct stock picking, if anyone wants to invest in all these 50 companies, you would require a huge amount of money.
Advantages:
- One can diversify portfolio even with little amount by investing in MFs
- No need to worry about individual stock performance
- Less risk
- No need to have much financial knowledge to invest in these MFs since we are not doing direct stock picking
Disadvantages:
- There is no free lunch in this world, there is a charge called Expense ratio, fund manager will be taking that amount in order to manage your funds.
- Suppose, you did not like one of the companies in which Mutual Fund manager is investing, you cannot go to the fund manager and ask him to stop investing in that company. You don’t have access to do that boss.
- Since you are investing via Mutual Funds route, risk will be lower when compared to direct stocks, so returns will also be lower when compared to direct stock picking.
- Even in the mutual funds, there are different types to confuse you and make it harder to pick the right one according to your risk.
Basically, in higher level, mutual funds are of 2 types, active and passive mutual funds.
In passive mutual funds, fund manager will not use his ability, he simply invest your money in all the companies which index is holding. Suppose there is Nifty 50 index in which top 50 companies will be present, fund manager will blindly invest the funds in all the 50 companies present in the index, so if you invest in these type of funds, if the overall index goes up, your fund will go up and vice versa. Nothing complex here. So, expense ratio or charges will also be less when compared to active mutual funds.
In Active mutual funds, fund manager will actively select the companies and invest your funds rather than going blindly and parking your money in overall index, sometimes even if the market goes up, your fund may not perform well because your fund manager might have choosen underperforming stocks unfortunately. In some cases, skilfull fund managers will perform better than than market and offer better returns than the passive or index funds. Expense ratio and charges will be higher in the active mutual funds. Major task for our investors is to select the best fund manager by checking his previous history, degree, skills and all. But the basic problem with active mutual funds is, what if fund manager changes? That fund may or may not perform well. And even if fund manager does’nt change, how can we bet on that single person and assume that we can make better returns than index funds. It’s our choice anyway.
Pat your back if you are reading till the end, let me give my verdict on stocks and mutual funds.
If you are a new bee completely, simply go with index/passive funds, don’t give a second thought. In the index funds, we will have Nifty 50 index funds, Nifty midcap and Nifty smallcap index funds. So, depending on the ability of risk you can afford, pick that index fund.
Nifty 50 implies top 50 companies
Midcap fund implies medium size companies
Smallcap indicates small sized companies
If you know something about the market and wanna give a try, invest 20-25% of your funds in direct stocks and rest of the money you should park in mutual funds. If you have time and ability to study about the fund manager, select active mutual fund or else simply pick index fund whichever suits you.
Nicely explained
Thankyou