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Mr Sharma was on the way to his office one morning when he spotted his colleague Mr Verma stepping out of a fancy new car. As far as Mr Sharma knew, Mr Verma's salary was similar to his own. He could not contain himself and asked Mr Verma how could he afford such a car? Did you win the lottery by any chance?, enquired Mr Sharma.
Mr Verma enthusiastically responded stupendous profits made in stock markets made my dream of buying the car of my choice come true.
Mr Sharma was very impressed and decided to invest all his savings in stocks as well.
He called an investment adviser to seek advice on which stocks he should select. The adviser told Mr Sharma not to invest all his savings in stocks directly, but he advised him to invest in Mutual funds instead.
The financial adviser explained that there are surely instances where people earned huge profits by investing in stocks directly, but they were a handful of people. A lot of people, in fact, have burnt their fingers in the stock market by acting on tips or unsolicited advice.
The investment adviser then explained the following advantages of choosing Mutual funds over stocks.
Diversification
When you buy stocks, you are investing in a few selected companies. With Mutual funds, you will get units of as many as 50-100 companies.
As the portfolio consists of multiple stocks, any fall in prices of one or more shares will be compensated by the rise in prices of one or more other shares. It is unlikely that the prices of all the shares will rise or fall at the same time.
Thus your portfolio is well-diversified (across various instruments and investment styles) thereby reducing the overall risk. Mutual funds also allow you to have exposure to debt and money market instruments along with equity which further diversifies your portfolio.
[Read: Is Over Diversification Good For Your Mutual Fund Portfolio? Know Here]
Suitability
One of the best benefits of Mutual funds is that you can customise your investment portfolio by aligning it well based on your risk profile, investment objective, the financial goals you are addressing, and the time horizon to fulfil the financial goal. This is possible by selecting suitable types of Mutual funds such as equity, debt, hybrid, solution-oriented and other schemes.
You can also choose from sub-categories within each asset class such as Large-cap Funds, Mid-cap Funds, Corporate Bond Funds, Liquid Funds, etc. as per your risk profile. It allows you to select funds based on your short, medium, or long-term requirement so that you can align your funds to different financial goals.
Low cost
A stock price may range from a few hundred to few thousand. You have to buy multiple shares of different companies to get the maximum benefit. Your total investment can, therefore, run up to a few lakh Rupees, with stocks of very few companies in hand.
On the other hand, Mutual funds will allow you to hold units of multiple companies with a monthly investment of as low as Rs 500 via Systematic Investment Plan (SIP), a mode of investing in Mutual funds.
Disciplined approach
You can invest a fixed amount at a regular interval in Mutual funds through the option of Systematic Investment Plan (SIP), which ultimately can help you accomplish the envisioned financial goal. SIP inculcates the good habit of saving regularly and systematically regardless of market conditions.
In fact, the rupee-cost averaging feature of SIP enables you to buy more units when the prices are low and fewer units when the prices are high. This way it helps you mitigate the risk of high volatility while you endeavour to compound wealth over the long-term.
Such a disciplined approach to investment is crucial for long-term wealth building.
Investment in stocks generally leads to impulse buying and selling, which may give you very high returns but the risk too is heightened when you directly invest in stocks.
Professional fund management and Research
Mutual funds are professionally managed by a proficient fund manager/s and his team who hold wide experience and expertise in the capital markets.
Based on the investment mandate of a respective mutual fund scheme, the fund manager/s will select stocks for the fund's portfolio backed by thorough research -- analysing various micro and macro parameters --so that you, the investor, earn a reasonable return and the stated investment objective of the scheme is achieved. All, you, the investor got to do is select suitable mutual fund schemes for your portfolio.
Investing in stocks, on the other hand, will require you to do your own thorough research. You may not have enough time and/or knowledge to be able to select the best stocks to invest your hard-earned money into.
Moreover, with Mutual funds, reviewing the portfolio once a year will be enough to track the performance of the funds. While if you have selected the stocks without diligent research, they will have to be reviewed often, which will take up a lot of time and may become a stressful experience.
[Read: Sensex Near 40,000! Do You Have A Robust Investment Strategy In Place?]
After hearing this, Mr Sharma understood that putting his money in stocks would be akin to putting all the eggs in one basket.
He realised that systematically investing in Mutual funds will help him plan and achieve his financial goals in a better way and even ensure the liquidity of his portfolio. He would also be able to track and make changes in the portfolio whenever necessary.
Lastly, he decided that he will not let other people's investment style influence his own as every person has different requirements and risk tolerance.
You can take a cue from Mr Sharma and take the first step towards financial freedom.
Happy Investing!
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