For every youngster who has recently started working or has just about found professional stability, financial planning for various stages of life in the future is very important. Most of us want to not only create a substantial retirement corpus but also want to lead a comfortable life. This requires you to plan your finances according to your present income and future requirements. Wealth creation is not an easy task and requires considerable planning and deliberation. There are several investment avenues that you can consider for your financial future, but one of the most popular options is investing in the equity market.
Foraying in the equity market is not an easy task. It requires a lot of research, strategy formulation, monitoring, and decision-making. But the returns offered by the equity market in the long-run are far too attractive to be ignored. When it comes to millennials, there are two routes to venture into the equity market – Stocks and Mutual Funds.
- What are Stocks?
Stocks, also known as shares or equity, indicate the ownership in a company. The percentage of stock you hold in a company defines your stake in that company. Stocks create wealth in two ways. One is through the regular dividends that the company pays to its shareholders and the second is through the appreciation in the market price of the share. You can indulge in stock trading through an online platform by yourself or appoint a broker to do so on your behalf. Investing in stocks directly is a risky and costly proposition. It is advisable only if you have sound knowledge of the market and have a considerable risk appetite.
- What are Mutual Funds?
A mutual fund is essentially a trust, that is managed by professional fund managers who invest the money of many investors on their behalf. A mutual fund collects money from various investors, who usually do not have sound knowledge about the market, and then invests the money in various stocks or bonds as per the scheme’s objective. Your ownership is defined by way of the units of the scheme allocated in your account. The Net Asset Value (NAV) indicates the intrinsic worth of one unit of the scheme. Though trading of mutual fund shares goes on throughout the day, the price is adjusted only at the end of every day.
- Mutual Funds vs. Stocks
Deciding where to invest your money, i.e. in shares or mutual funds could be tricky for anyone. Three significant factors affect your decision to choose either of the two, and they are:
(i) Risk Appetite
Investing in stocks entails higher risks as compared to mutual funds. If the stocks of the company crash, you face the risk of losing all your investment, whereas if the prices of the stock increase substantially, you will make a handsome profit.
In case of a mutual fund, your risk is offset through diversification. An equity mutual fund consists of stocks of different companies from different sectors, so the risk is divided. You might lose a certain percentage of your investment in the worst case scenario, but the probability of losing all your money is relatively low.
(ii) Time and Knowledge
If you want to invest in stocks, you must be prepared for spending hours into understanding the fundamentals of every company you are investing in. You will need to be able to read financial reports and analyse them. Moreover, you must know the state of the economy and future expectations. Without putting in the required effort, you will not be able to identify the best companies to invest in.
Unless you have the luxury of time and knowledge, opting for mutual funds is a better decision. The fund managers do all the research for you. But that does not mean you can trust any mutual fund blindly. You need to study its past performance and identify the sectors you wish to invest in. The state of the economy will also have an impact on your decision.
(iii) Cost Factor
Investing in stocks directly is a costly affair. An average portfolio would require at least 7-10 stocks for diversification. The unit price of a company’s stock is usually high. To create a well-diversified stock portfolio, you may have to shell out a huge sum.
As opposed to this, investing in mutual funds may start with a nominal amount of as low as Rs 500. With the same amount, you can achieve greater diversification as compared to direct equity investing.
There is no ‘one size fits all’ approach applicable when it comes to choosing between mutual funds and stocks. The decision must be based only on your risk-taking ability and the future requirements that you have. Whichever mode of investment you choose, do so only after due deliberation.