When it comes to investing to build financial wealth, everybody wants to invest their money somewhere they can move towards their financial goals with minimal risk. A long-term investor always seeks out for investment products that can offer steady returns with little or no risk on the loss of capital. Sure, there are many investment products such as public provident funds (PPFs), recurring deposits (RDs), fixed deposits (FDs), and many others that offer assured returns with little or no risk but, none of these investment options offer inflation-adjusted returns that you gonna need after 10-15 years.
Over the last 20 years, the equity market in India has consistently delivered superior long-term returns compared to other investment options like PPFs, RDs, and FDs, etc. This has led to a growing interest of investors to rather invest in equities and generate inflation-adjusted returns in the long-term.
An investor can either invest directly in equities of public listed companies or indirectly invest in equity mutual funds. However, there are certain relative benefits and drawbacks of each investment option which all depend upon your specific needs. It may not look so, but it is one of the most difficult decisions investors have to make whether to invest in direct equities or equity mutual funds.
In this guide, we’re going to explain both investment options, you can criticize and make a choice of whether to invest in direct equities or equity mutual funds.
When it comes to volatility, stocks have high volatility however the volatility in equity mutual funds is far less. Investing in direct equities is not just about buying a bunch of stocks as a long-term investment based on stock market tips or advisory. When you invest in direct equities, you would require consistently monitoring your equity portfolio and conducting thorough analysis from your end too. The analysis required some skill-sets and prior knowledge in selecting stocks and monitoring them. These include fundamental analysis, economic data, and dynamics of industry, companies’ reports, and how the stock operates.
On the other hand, in case of the equity mutual funds, instead of focused on a company’s stock, you buy a complete portfolio where each stock has their own price movements which sometimes cancel each other out. Plus, every investor appointed with a fund manager while investing in equity mutual funds which would ease off your burden of monitoring portfolio.
One who holds the knowledge of stock investments & stock analysis and looking for potential inflation-adjusted returns can invest in direct equities otherwise, one who dreams to build financial wealth with minimal risk as possible can go for equity mutual funds where in-depth knowledge won’t require.
However, the returns will not be the same as in investing in direct equities but the risk would be a lot less.
It has often seen that many individuals let their emotions sway their investment decisions making them overinvest in a particular stock in believing on some random tip or advice which leads to bad experiences when things don’t work out as expected. However the risk management guidelines in equity mutual funds filter out the sentiments from making rash portfolio decisions.
In equity mutual funds, you will be invested in a set of stocks where there’s always a limit on investment per stock to manage the risk on each stock.
You need to know that investing is all about spreading the risk within your portfolio. Generally, it is usually done by diversifying a portfolio across different financial assets such as equities and debts. By proportionate the ownership through different assets you can actually manage the risk and secure your future returns.
By diversifying your equity mutual fund portfolio you can survive even if some of your stocks do not do well in the future.
Active portfolio management is important for successful long-term equity investment. But, it would require you to buying and selling equities. As a direct equity investor, you would require a large sum of capital since the average transactional cost will be higher in comparison of equity mutual funds. Over time, this cost will start eating your returns. Although both investment options charge an expense ratio near around 2-2.5% annually but when it comes to the benefits, the equity mutual funds outweigh the direct equities.
Unlike, direct equities, the equity mutual funds offer innovative investment and withdrawal options and come up with a variety of features like systematic investment plans (SIPs) and systematic withdrawal plans (SWPs) which allow investors a disciplinary approach and offer a seamless experience to enter, manage, and exit the funds anytime they want.
The disciplinary approach is utmost needed when making a long-term investment. By investing in equity mutual funds, you can get the same rate of returns while keeping the risk as low as possible. On top of that, you won’t need to be an expert in the stock market.
Hope, this article helped you in deciding which is the best long-term investment option for you? – You can criticize these factors and on the basis of that choose whichever seems reliable to you. Direct equity investments are really for those investors who hold the knowledge of the stock market and can pick the right stocks to invest in.
Nevertheless, if you have any query or would like to add something then please don’t forget to mention in the comment section below.