May 28, 2022

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Why invest in mutual funds rather than stocks directly?

Mutual Funds More Suited For Beginners Than Direct Stocks | Mint

Stock markets are one of the investment options known to give their investors the highest returns compared to their counterparts. This is because when you invest in stocks, you get to use the growth of some large and high potential companies and grow your money along with their growth. But at the same time, investing directly in stock markets comes with risks parallel to the investment potential. Hence, direct investment in stock markets demands high alert and more profound market knowledge. Mutual funds present themselves as an ideal solution to this. Let’s learn more about mutual funds and see how they can help in this context. 

What are mutual funds?

Mutual funds are an investment option where a fund manager pools money from different investors and invests in a portfolio created according to the fund’s theme. The portfolio here could include a variety of securities, again according to the fund’s theme, including stocks. If you fancy investing in stocks through mutual funds, you could choose a fund that focuses on equities. But how does investing in stocks through a mutual fund differ from investing directly in them? Let’s find out. 

Advantages of investing in stock through mutual funds

1) It demands less research and knowledge

Stock markets can get highly volatile, and you need to be highly knowledgeable to reap higher benefits. Although mutual funds, too, demand research and knowledge, it tends to be lesser than what investing directly in stocks does. This is because asset management companies, also known as fund houses, appoint expert fund managers to handle your money. As mentioned above, different mutual funds will have different themes, and these asset managers create a portfolio according to the fund’s theme. Owing to the involvement of an expert fund manager, your role is limited to finding your investment horizon and choosing a fund that matches it. 

2) It tends to be less risky than stock market investments 

Although mutual funds invest in stocks as well, they tend to be less risky. This is primarily due to the effect of dilution. For instance, suppose if you invested in a tech company’s stock and it went down, you might end up losing a significant amount of money in this situation. But, at the same time, if you had invested in a mutual fund with that company’s stock in the portfolio, your loss could be significantly lesser. This is because the particular stock will only be a part of the considerable portfolio the fund could have, and hence, the effect of the loss will be much diluted. 

3) It offers more diversification 

Getting a diversified portfolio out of a stock market investment is often challenging. You will have to sit down, do your research, and develop a list of stocks that can offer significant diversification. Not only that, but you will have to change the portfolio often as the stock market changes too. At the same time, diversification comes as a default in most mutual funds. This is because the portfolio is built with diversification in mind for most of the funds. This saves a lot of hard work and time. 

Mutual funds vs stocks – What should you choose?

The choice between investing in mutual funds and stocks solely depends on your investment and personal preferences. If you are well-versed with the nuances of the stock market, investing directly might be more beneficial for you. If that’s not the case, mutual funds could prove more suitable. Since stocks do not extend the feature of systematic investment plans whereas mutual funds have the same. Talk to your investment advisor and figure out your investment horizon before you choose.