If you are in favor of investing in risk-free products like fixed deposits or government securities, think again. When you look at the rate of inflation, these fixed-income securities often deliver lower than inflation returns.
Historically, when you look at any long-term investment, equities seem inevitable. The opportunity to earn greater returns through higher risks favors equity investments. Having understood that equity investing is inevitable to build wealth over the long-term, the question is how to start your investments.
This becomes more difficult if you have never invested in stocks before. You may find it tough to determine where and how to commence. Equity investing may be done in two ways.
- Direct investing in individual stocks
- Through equity mutual funds
Although the primary objective of both these strategies is to earn higher returns, these are completely different strategies.
If you are not an expert with a thorough understanding of how stock markets work, direct investing may not be the best strategy. However, the lack of experience and expertise does not necessarily mean you cannot succeed. The possibility of making exceedingly high returns is limited.
It is also possible that you will achieve success only after facing several failures. On the other hand, there may be a situation when you are disheartened by your failures and may quit before you are able to make profits. Additionally, you need to stay abreast of all the market news and price movements to know exactly when to enter and exit your investments. Timing the market correctly is almost impossible even for the experts, which means you may not be able to get it right, as you are a relatively new investor.
Equity mutual funds
A better option to invest in stocks is through equity schemes offered by the various asset management companies (AMCs).One of the biggest benefits of investing in such funds is the inbuilt diversification. Experienced fund managers choose different stocks to invest the fund corpus, which provides portfolio diversification.
Here are three benefits of investing through equity funds.
- Regulatory framework
Certain investment principles and pre-specified philosophies guide every scheme. This allows you to choose a mutual fund that most appropriately suits your personal needs and financial objectives.
- Smaller investments
This is one of the most beneficial features of these funds. You may invest through Systematic Investment Plans (SIPs), which do not cause financial distress. An amount of as low as INR 500 may be invested in these plans. In addition, you may choose to invest a specific amount on a certain date in your chosen funds. SIP investments give you the flexibility to increase or decrease the investment amount. You may also start and stop such plans at any time without any difficulties.
When you frequently trade in stocks, you may have to pay tax on your profits. However, the fund managers buy and sell shares, which ensure you do not pay any tax on such trading.
Choosing between direct stocks or equity funds through an SIP depends on your personal need and financial goals. It is important you consider all aspects before making your choice.