Should I invest in mutual funds or individual securities?

Should I invest in mutual funds or individual securities?

The choice between the two is a difficult one to make. It also depends on certain factors like your age, risk appetite, financial goals among other things which will help you create your ideal financial portfolio. To be fair, you needn’t make a choice between the two – You can invest in both of them in a certain proportion, taking care to avoid duplication.
A. Investing in Equities
· High risk: Equity share investment is a risky investment as compared to any other investment like debts etc. Stock trading is investing in a business, and business involves risk and can go leg-up for reasons many times, not in its control.
· Stock investing requires knowledge: You have to have adequate knowledge about the market. You need to understand the way the markets work, keep updated regarding the daily events that affect the market.
· Research and analysis are a must: You should have the time and knowledge to research and analyse a particular stock before investing in it. It is always better to do the basic homework yourself. Relying on recommendations may hamper your investment style and may not be plausible for your goals.
· Emotions under control: Emotions tend to blind our investment decisions. It is also a human tendency to get bogged down when the markets fall and get too elated when the markets rise, making it difficult to follow through our investment plan.
· Financials must be in order: Investing in stocks is risky. And in order to take that risk, you need to invest money you would not require for the next 3-5 years. Which requires you to have an emergency fund that can take care of basic expenses for at least 3-6 months.
B. Investing in mutual funds:
· Experience of the fund management team: In a mutual fund, your investment is handled by a fund management team. The more experienced the fund manager, the higher the chances of generating alpha (returns over and above the benchmark).
· Mutual fund investment should be goal-linked: The goals with the longest timelines (eg: retirement), should be prioritized in savings. This is because of the magic of compounding will let your money work optimally.
· Know your fund expenses: Be aware of the charges involved when investing in a mutual fund. This is known by the TER or Total Expense Ratio of the scheme published in the factsheet and on respective websites of the fund houses. It goes without saying that lower the expenses, the better your returns.
· Diversification is the key: Do not put all your eggs in one basket. Any good investment will be spread across asset classes (equity, debt, etc). The weights allotted to these categories will depend upon your risk appetite.
Summarising: Now as we can see from the points above, stocks involve self -investing while mutual fund investments are an indirect investment taken care of by an experienced management team. However, both create wealth for the investor. What you need to see is which investment suits you better. If you are a person who has a high-risk appetite and has adequate knowledge about equities and the dedication required to pursue it, stock investing will work for you. If not, mutual funds will be a better bet.
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