Go for equity mutual funds investment if you want to avoid risks

Empirical evidence points that wealth creation is achieved through investing in equity over long periods of time. And investing in equity, though is not a rocket science, would certainly need a bit of understanding about the businesses (companies) that one chose to invest in, to analyze the macro-level environment and the sector of the company, etc.

A study at that level would definitely require additional skills and most importantly time to do this research. It would be an up-hill task for those who have never done and especially for the beginners, it would be clueless. 

There are innumerable books and literature available on how to go about on investing in the stock market; sometimes could confuse due to the conflicting approaches. So, as an alternative, one could explore equity mutual funds for investing while they could analyze the stocks as they reap the benefits of the investment returns.

While direct stock investing and mutual funds help the investors in reaching the same goal, the approaches are quite divergent. It’s easier to create wealth through MF though, I’m not discouraging from someone taking the direct equity route. 

Undoubtedly, direct equity investing saps up lots of energy in trying to identify the right stock, keeping a tab on that while the success is limited. Without proper guidance or research, one may encounter failures or investment losses due to wrong investment decisions and judgement.

Moreover, the losses generally are higher than that of the gains made in these investments. These failures along with the financial losses could play detrimental and dispirit an investor from pursuing equity investments and sometimes may also lead to complete aversion to equities defeating the original purpose. 

Equity MF on the other hand, offer the best of the investing world with a simpler approach. The bigger hurdles of research are nullified through it’s passive investment style. Also, one of the major advantages that these funds provide is diversification.

Unlike, in direct stock investing, the entire money is spread across of one or few stocks, the equity MF investments are spread over a larger universe brining the risk down considerably. Another critical factor is the availability of professional and qualified personnel who are on-hands about handling and managing stock markets.

These teams are led by fund manager of organisation who operate in a well-structured and highly regulated environment to ensure safety. This procedural and process-driven investment philosophy could be achieved by undergoing a minimal cost structure which is not explicitly charged.

One could gain from investing in small and flexible amounts tailored to their budgets while investing in MF. For instance, with a small amount of money one could only invest in one particular stock or few numbers of stocks but by employing the same amount, a MF investor gets to expose the money across a portfolio which is comprised of many stocks. This could also help in bringing discipline which forms an important behavioral aspect of investing in stocks. 

By doing direct stock investments, the investor has to also worry about the tax liability that’s borne with the stock trading and the various transaction costs that are associated with it. Though, MF investments are subject to respective equity taxation laws, the transaction costs don’t come in the way of additional costs for the investors.

Top on it, the MF investments are flexible to initiate or cancel a systematic investment while allowing to increase or decrease the contributions. Also, any lumpsum investments could also be done along with the systematic ones making it easier to operate.

While investing in MF, the inquisitive investor could find out how the stocks are being picked or dropped by the fund manager in his fund and gain insights which might help one to learn a few tricks. Overall, the equity MF investment forms a lesser riskier investment than that of the direct stock.  (The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at knk@wealocity.com)