Are Mutual Funds better than stocks?
That’s the one key question comes to everyone’s mind who wants to invest in stock markets! Let’s look at different aspects of investing in mutual funds and investing in stocks directly, and then come to a conclusion.
How safe are Mutual Funds?
Just like any other financial instrument, mutual funds are not without risk. When defined in terms of chances of losing money, the risk in mutual funds is no different than that present in other financial instruments. Still they are relatively safer and a more convenient way on investing. In mutual funds, you can control risk by choosing a fund that suits your risk profile. On the other hand, picking stocks individually that will both meet your objectives and match your profile can be tough.
What advantages do mutual funds offer over equity stocks?
Here are a few considerations :
Systematic Investment Plan : Small sums (starting from Rs 500) of money can be invested monthly or quarterly. Nowadays SIP in stocks is available via various online trading platforms, but you cannot invest as low as Rs.500 in stocks, if the price is above that value.
Reinvesting dividends : Funds provide for automatic reinvestment of dividends. In India, this facility is not so far available with equity shares.
Diversification : Most mutual funds spread the money over a number of shares depending on the fund size. This lowers the risk from an investment loss in a few shares. Even if any one or two shares were to under perform, their impact on the Net Asset Value may be only restricted to their proportion of holding.
Whereas, if you have a small capital, the money will not buy many shares of a single stock, and it will certainly not buy many different stocks. By putting your money in only two or three stocks, you are exposed to the possibility that one of them will plummet in price, wiping out much of your invested capital.
Now as we see the markets are quoting at historical highs, NSE Nifty at 10,400 and BSE Sensex at 33,000, many stocks are trailing way below their all-time highs.
The conclusion is, unless one has the required expertise and is ready to dedicate considerable time and effort in stock investing, it is better to invest their money through the mutual funds.