The Indian financial market offers a wide range of investment opportunities, each tailored to a different investor profile. Equity is a good investment option for the risk-averse, aggressive individual. When equity is added to an investment portfolio, the risk associated with an investment may be larger, but the potential for higher-than-average returns also increases dramatically.
If you’re a risk-averse investor who is willing to take on more risk in exchange for the possibility of better long-term profits, equity investments are for you. However, there are two main strategies to increase the equity in your investing portfolio. Direct equity investments are the first option. The second option is to invest in equities mutual funds. Let’s now look more closely at these two types of equity investments for a better overview –
What is Direct Equity?
You invest directly in the stock market when you use direct equity. To do so, you’ll need to open a Demat and trading account, as well as invest in the stock market through a stockbroker. After that, you can purchase securities directly from the stock market. To put it another way, you can buy stock in companies that are listed on stock markets such as the NSE and the BSE.
Because direct equity involves you making your own investment decisions, it is a better alternative for seasoned investors who are familiar with how the market works. Market timing and buy, sell and hold decisions must be made on a regular basis. It’s also crucial to stay informed on domestic and international happenings. If you can meet these standards, investing in direct equity is a viable option.
As an investor, there are numerous choices of direct equity for your investment portfolio & they are –
- Your investments are completely within your control.
- During a trading session, you can sell your holdings at any time.
- Because you can purchase or sell a single stock, you can select individual stocks.
- You can engage in speculative trading.
What are Equity Mutual Funds?
Equity mutual funds are investment choices in which funds from a variety of interested individuals are pooled and used to purchase stocks and equity-based assets from various publicly traded corporations. Equity funds, like all other types of mutual funds, are divided into groups based on the companies in which they invest.
Large-cap equity funds, for example, invest in large-cap companies. Banking and financial funds invest in stocks in that industry. And focused equity funds invest in a portfolio of up to 30 companies that are focused and of high competence. Professional fund managers administer equity funds, making choices about whether to buy, sell, or hold the assets in the funds.
There are numerous advantages to selecting equity mutual funds for your equity investment, some of which are outlined below –
- Your funds are invested by a specialist with extensive market knowledge.
- Because mutual funds invest in various companies, your investment has already been diversified to some extent.
- Your entire potential risk is greatly reduced.
- To save money on taxes, you can invest in tax-advantaged mutual funds such as ELSS.
What’s the difference between Equity Mutual Funds and Direct Equities?
While both mutual funds and equities and stock investments are usually regarded as solid long-term investments, it is critical to grasp the differences between the two in order to appropriately assess which type of investment best suits one’s risk profile. So, the following are some of the major distinctions between mutual funds and stocks:
1. Risk – Mutual funds are typically thought to be best suited for people who have a low-risk profile or are naturally risk-averse. Equity or individual stock investors, on the other hand, are more active and willing to take risks.
2. Returns – While mutual funds can provide investors with good returns over time, equities stocks can provide investors with exceptionally large returns in a much shorter amount of time. Stock investing is difficult and should only be attempted by those who have a thorough understanding of market conditions.
3. Volatility – By their very nature, equities and their individual stocks are extremely volatile. Within a very short period of time, the value of these investments could explode or plunge, resulting in either tremendous profits or devastating losses. Mutual funds, on the other hand, are a far more stable kind of investment due to their diversification. Because all gains and losses are spread out among a larger number of equities, it is a less volatile investment.
4. Convenience – Individuals who invest in mutual funds have a fund manager to look after their portfolio, making it a very easy way to invest. Due to the ever-changing nature of individual equities, however, investing in equity necessitates continual monitoring of one’s investments. Investors in stocks rely on their own market knowledge, whereas mutual fund investors rely on the fund manager’s skills to lead them.
5. Cost of Investing – Trading in individual or equities stocks is frequently very expensive. Due to the significant trading costs involved, any profits generated from the selling of a stock might sometimes be wiped out. This is one of the reasons why only high-risk investors invest in stock. Trading in mutual funds, on the other hand, is substantially less expensive because the charges are spread across the whole of the fund’s portfolios.
Which is a Better Investment: Mutual Funds or Stocks?
Your knowledge of the market will determine whether you want to invest in mutual funds or stock. In order to invest in shares, ordinary people have two possibilities. They can either purchase shares directly from listed companies through a Demat account or indirectly through equity mutual funds. The best option for you can be determined by your investment requirements.
Both mutual funds and equities stocks have advantages and disadvantages, according to the facts presented above. As a result, it is strongly advised that anyone interested in investing in either one take the time to figure out which type of investment best fits their profile and budget. However, regardless of your investing strategy, it is important that you review your investments at regular intervals to see if your financial objectives are being reached.
RURASH is one of India’s investment management firms, providing financial solutions to augment the client’s wealth and facilitate building a legacy.