Buy Stocks or Invest in Mutual Funds?

This is an inevitable question which pops up at every social or a familial event I go to.

If we recapitulate, stocks is shares or ownership in a company you buy. You call a stock broker and open a trading account and buy or sell shares. You will need a demat account to buy a share.

A demat account is an account which you open with a depository participant which will store your shares electronically.

To give you a few examples you can buy shares of a particular company like say Reliance Industries or Bajaj finance or State Bank of India.

When you buy shares of a particular company you are buying ownership of company and your fortunes get tied up with the companies’ fortune. The company’s business, its strengths and weakness, its financial structure and the business and socio economic environment it operates in.

If the performance of the company is stellar, hallelujah J , your stock price may rise and you will laugh all the way to the bank.

You may have to closely track the companies you have invested in.

Say you have invested in 10 companies (because only a crazy person will put all their eggs in one stock), you will have to track the doings and monitor the stock price of all of them.

Investing in Stocks directly is a time consuming activity. You should have the discipline to do it consistently.

Here we are only talking about a equity based mutual fund. A mutual fund is a basket of stocks which you buy. Say like a Diwali hamper. J In one scheme there are many stocks and there is a fund manager whose is qualified to understand the stocks and monitors it every day.

There are hundreds of schemes so one will have to pick and choose the scheme one wants to invest in. Investing in a mutual fund is like investing in bouquet of flowers with every flower being different from other which is carefully picked out and arranged to make it look beautiful too.

Quickly, What’s better ? Stocks or Mutual funds?

Both have a place in your portfolio. If you understand stocks and have the time to pick them out by all means go out and buy them. It can be exciting too, to buy and keenly observe the ups and downs of the stocks. It can be thrilling and there are many who get a high and would rather do nothing else in life.

Whereas in a Mutual fund, your job is to pick out a good fund manager and an appropriate scheme invest and then chill.

You make sure your fund manager is not a dud every once in a while and your job is done. To make sure he is competent you compare his schemes performance with the benchmark and peers and make sure his performance is in line.

Finally, What is the verdict? Direct Stocks or Mutual funds?

If you are new to investing , most certainly mutual funds.

As you gain experience and if stocks interest you then you can build your own portfolio.

Mutual funds can find a place in portfolios of both experienced and novices. A Mutual fund has many stocks so it spreads the risk and also an experienced fund manager and professional analysts who track the portfolio.

Stocks are glamorous but can be treacherous. Mutual funds can be staid but steady.

So my leaning for new investors certainly is Mutual funds.