Know why to invest in mutual funds and not directly in stocks

Know why to invest in mutual funds and not directly in stocks

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Picture this scenario: Meet Sahil, a young professional who has just received his first increment from work. Sahil wants to build his financial portfolio and is thinking about investing in the stock market. He consults his friends and family, some of whom suggest he should buy stocks directly himself, while others recommend mutual funds. Sahil is left confused about whether to purchase stocks directly or invest in mutual funds.

Both stocks and mutual funds investments help investors to build portfolios, earn returns, and grow wealth. Owning a stock means earning a percentage of ownership in a particular company. Mutual funds are professionally managed investment schemes that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.

Investing in stocks can be tempting because it gives you control over which companies to pick, invest, and support. However, there are various reasons why it is beneficial to choose mutual funds over direct stock investments.

1. Risk

Stakes are much higher when you invest directly in stocks. This is because factors such as market volatility, company-specific risks, and macroeconomic conditions make them more volatile and prone to losses. These factors can impact the stock’s performance and your returns.

Mutual funds offer access to different investments and asset classes, such as equities, debts, gold, and real estate. This diversification minimises the impact of market fluctuations and reduces the risk associated with direct stock investments.

2. Professional management

Choosing to invest directly in stocks is risky as you rely on your own research, knowledge, and skills. This can limit your growth as you may not have access to the same tools and resources that professional fund managers do.

Mutual funds are managed by professional fund managers having years of experience in the stock market. These managers run in-depth research, analyse financial statements, evaluate market conditions to make calculated decisions to bring maximum value to the fund’s shareholders.

3. Convenience and easy trading

Direct stock investment demands a lot of time and effort. You need to research each company, analyse its financial statements, cash flow, monitor stock prices daily, and then decide if buying or selling is a wise idea. This process is not only time-consuming but even one small mistake can lead to huge losses.

Mutual funds offer a convenient way to invest in a diversified portfolio without the hassle of researching individual stocks. There are multiple online platforms available to make investments in mutual funds, track the market in real time, compare the performance with other funds, and adjust your strategies as necessary.

4. Tax benefits

Mutual funds come with tax benefits. For example, equity linked savings scheme (ELSS) fund, a diversified equity fund, makes you eligible for tax deductions under Section 80C of the Income Tax Act, 1961. This helps you grow your capital through the high growth potential of equities and reduce your tax liability at the same time.

5. Instant diversification

With mutual funds, you get access to different portfolios of stocks and other assets to minimise risk and get steady growth. In fact, just one index mutual fund can give you exposure to hundreds of stocks.

When you invest directly in stocks, you may have to buy 20-25 different stocks to get the same level of diversification. This is not only difficult but also time-consuming and costly.

To wrap up

From diversification and professional management to ease of trade and less risk, mutual funds offer certain benefits over direct stock investments. But that does not mean you must choose one or the other. It is possible to use both investment options to optimise risk management, growth opportunities, and returns in your portfolio.

To understand better how each might fit your investing style, goals, and risk tolerance, you can consult a financial advisor and get valuable insights.

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