Investing in mutual funds, investing in equity shares and trading in stocks – all three practices share the common goal of earning a higher return from your savings. However, the manner in which this end is achieved differs greatly in all three cases. A lot depends on your end goal, level of experience and risk appetite.
Below, you will find some broadly outlined differences between the three that would help you decide which one is best suited for you.
Each individual has a certain disposable income that determines their appetite for taking risks and what they are willing to lose in order to achieve gains. Having said that, all three types of investment come with a certain inherent risk. If you are relatively new to the stock market, then investing in mutual funds could be your best bet as the level of risk involved is comparatively low. Investing in shares entails more risk than in mutual funds but less than equity trading. Day trading is your highest risk proposition which requires fast and decisive calls that can lead to large earnings, but even minor slips can result in major losses too.
Investing in mutual funds requires a very minimal level of involvement from you because a mutual funds manager bears the responsibility of managing and monitoring how your money is invested. But if you are willing to spend a little time educating yourself in market trends and specific shares then you can consider investing in shares. In this case, since there is no professional funds manager to monitor your investments, you will have to do your research carefully and make sure you invest your money wisely to minimize risks. If you are willing to go all out and put in considerable amounts of time, you may be ready for trading in shares where the risks are high, but the rewards can be high too.
If you can afford to invest your money for a certain period without needing to withdraw your investment, then investing in mutual funds or shares could be the right option for you. This is because mutual funds and share investments are relatively less volatile in nature and grow slowly and gradually over a longer period of time. However, if you would rather circulate money in the stock market with an easy exit route at any stage, then trading in shares is better where you will be looking to take advantage of the rise and fall in share value that happens on a day to day basis and requires no long term planning.
When investing in mutual funds, your research work is limited almost entirely to choosing the right mutual funds operator, beyond which there is very little for you to actually do. On the other hand, investing and trading in shares both require considerable amounts of research but in very different directions. When investing in shares, it is important you gain a sound understanding of the fundamentals of the company – factors that determine how well the company will do in the long run. Trading in shares is more dependent on short term technical factors such as market trends, breaking news or any other announcement that creates temporary fluctuations in share prices.
Your mutual funds manager ensures that the risk you take is minimum by investing your money across a range of shares and industries. This is important so that you’re not over dependent on any one share. And even if some of your shares are affected negatively, the downward slide to your overall investment portfolio is negligible. While investing in shares individually, you will have to ensure the same by spreading your money across a broad range of companies and sectors to keep yourself insulated from sudden setbacks. Diversification isn’t very relevant to day trading as buying and selling shares profitably during a day is limited to the shares you are trading in and you don’t stand to gain much by dealing in a combination of different shares.
As you can see, all three practices have their pros and cons. Hopefully, the points listed above should help you make a wise and carefully thought out decision. Happy trading (or investing)!!!