Mutual Funds Vs Equity
Dinesh always had a knack for the investor market. Since his teenage days, he has loved watching movies and series related to the finance genre. Now that he is earning quite well, he is looking forward to starting his proper investing journey. He has profound and thorough knowledge about these markets and their risks. He even holds theoretical knowledge on how to begin his investing. He was set to open a mutual fund immediately with all of this. His long-time friend suggested he go for direct equity as he knows the market. Dinesh was surprised by such bold advice from his friend. He decided to look more into the difference between mutual funds and equity.
Investing in mutual funds can help you reap great returns but investing in direct equity can be more rewarding. If you are confused between mutual funds vs equity, keep reading this blog post as we try to explain to you the difference between mutual funds and equity.
What are Mutual Funds?
A mutual fund scheme is a type of financial vehicle. In mutual fund investments, a cash pool is collected by a fund house or an asset management company from their investors. This collected money is then invested in security mechanisms like stocks, bonds, money market instruments, and other assets. Professional money managers make these investments.
They support your funds so that they can gain capital returns on the investment that is made. These investments generate high returns if invested properly. Mutual funds are subjected to market risks. The higher the returns, the higher are the risks on the investment. In mutual funds, an investor owns the units that represent the portion of the fund the investor holds.
After processing the applicable charges, the investors get the returns on the investment and other incomes earned on the units that one owns.
What is Equity?
The main difference between mutual funds and equity is that the latter form of investment is self-managed. There will be no interference by professional money managers like fund houses or asset management companies.
A direct equity investment can easily reap higher rewards than mutual funds, but the risk in investing in direct equity can be very high. As a direct equity investor, you need to know everything about the company you are investing in. Their records, experience in management, financial performance, etc.
It is also essential that you, as an equity investor, check the company’s external factors like government policy, foreign exchange rate, and political changes both domestically and internationally. Equity is never the first type of investment a beginner makes between mutual funds vs equity.
It requires practical knowledge of the finance market and an understanding of the underlying business and industry the business operates in. If you already have all this knowledge and are now familiar with the working of stocks and investments, then a direct equity investment will be suitable for you. If you can strategically balance between risk and returns, you can gain more incredible benefits from direct equity investments.
Mutual Funds v/s Equity
To better understand the difference between mutual funds and equity, it is essential to compare them and find their differences and similarities.
Differences between Mutual Funds and Equity-
- An investor has complete control of stock selection in equity but not in a mutual fund.
- The ability to buy and sell is possible at any time in the trading sessions in equity, but in mutual funds, it is possible only on business days.
- Entry or exit from a single stock is possible in equity but not in mutual funds.
- Exit load is not applicable in equity but is applicable in mutual funds.
- Individual selection of the stocks is possible in equity but not in mutual funds.
Similarities between Mutual Funds and Equity-
- Sectoral picks are possible in both.
- Investments can be made in systematic investment form in both.
- Both have high levels of liquidity.
Suppose you can still pick a side on the mutual funds vs equity debate. Here’s what we think.
Both of these investment methods have various advantages and disadvantages of their own. There are benefits of investing through mutual funds that investment through equity can not give. On the other hand, direct equity provides higher returns on investment, but one has to be thoroughly well versed with the working of equity markets regularly.
If you do not have the skill and time to monitor the growth of the equity or the share market, mutual funds are a better option out of the mutual funds vs equity for you. And if you are someone who solely wants to focus on investing and is skilled enough to understand equities and have time to trade and stock, then direct equity investment is better for you.
In between mutual funds and equity, direct equity is a lot more work, but if you upskill and get acquainted with the equity and share market, you can reap extremely high benefits from your investments. While mutual funds are a bit restricted, they are managed professionally, and the risk is less than equity. Both of them have their pros and cons. You must make a decision based on your understanding of the market and the amount of time you can dedicate.
Why is it said that mutual funds are subjected to market risks?
The investments made under mutual funds can give high returns on investments. But another fact of these mutual funds is that they are risky. It means that there are chances of reducing or losing the principal amount. This happens because the funds are invested in securities whose value in the market is never constant; they fluctuate, making the value rise and fall accordingly.
How do the fund managers take investment decisions?
There is a huge risk in mutual funds, and it is always advised to go through this investment with the help of an asset management company, bank, or a fund house, basically someone professional. These professionals run extensive research to match your investment objectives. They see the sector's market conditions and financial performance, individual companies, and specific securities.