When it comes to investing, there are many options to choose from. Two of the most popular options are mutual funds and direct equity investments. So, which is the better option? It depends on your goals and objectives. Here is a comparison of the two investment types to help you decide.
What is Mutual Funds
Mutual funds are a type of investment that allows the pooling of money from many investors to buy stocks, bonds, or other assets. A mutual fund company brings together money from many investors and then uses that money to purchase securities. The advantage of mutual funds is that they allow small investors access to professionally managed, diversified portfolios of stocks, bonds, and other securities.
So basically, as an investor, you own units representing the portion of the fund you hold. The investor is also known as a unitholder. The increase in the value of the investments, along with other incomes earned from it, is then distributed to the unitholders in proportion to the number of units owned. This is given after deducting applicable expenses.
What is Direct Equity?
An investment in direct equity is made directly into a company rather than through indirect means, such as buying shares on a stock exchange. This investment can be made through several methods, including private placement, venture capital, and angel investing. Direct equity investors typically have a more hands-on role in the company than those who support indirectly, and as such, there is a greater level of risk involved.
That means you as an investor must go through the company’s past records, financial performance, management experience, and even external factors such as Government policy, foreign exchange rate, and political changes domestically and internationally.
If you can balance find the right balance between risk and return, you can reap more significant benefits.
Mutual Funds Vs Direct Equity Investments
| Mutual funds | Direct equity investments |
|---|---|
| Mutual funds are secure than direct equity because of the loss because of this is less. | This is the method by which the owner gets the share from the company invested. The members have shares that divide between them to help in the company’s growth. |
| The ROR during the period is decent. | The ROR is a high profit in a shorter period. |
| The most dependent is the investors who had invested money | The problem is that it depends on the shareholders of the company. |
| Mutual funds have a straightforward process.So, for mutual funds, they pay expense ratios. The funds on the daily turnover claim the fees. | The major part of the direct investment comes with proper decisions. There should be an efficient system for buying and selling shares. It is complex.When the investors buy stock, they have to include the Demat account and certain other charges for the efficient transaction. |
Mutual Funds
A mutual fund is an organization that collects money from the people who have invested. The money is put into specific types of property and small-period loans. The money gathered by the mutual fund is the portfolio. At first, we must make an investment idea to benefit from mutual funds and make critical decisions.
To make it more transparent,
Suppose you are a representative of your class. You collect money for a tour purpose. The class students give money to you. Now, if the money collected is extra, then you provide the extra money to the students. In the same way, mutual funds organize the funds and management. As you collect money, the mutual fund also gathers money. When you return the money, the mutual funds return the money after the profit is made, like the initial investment.
Thus, a mutual fund is the safest way to get a reasonable Rate of return. When we choose mutual funds as our investment plan, first, we should go through a portfolio of more than 50 companies. The earning depends on the no. of stocks you invested.
Advantages Of Mutual Funds
There are certain advantages that mutual funds have over direct equities. Some of the significant benefits are stated below.
- You do not need professional knowledge about mutual funds as the fund managers will manage everything for you.
- You can invest in stocks as low as INR 500. Mutual funds are not too expensive, and the return is relatively high
- The fund management fees are low. If you want to trade inequities, you do not have to pay trading charges or DMAT.
- Risk management is quite good in mutual funds.
- You get to have options for investing in mutual funds. You can choose the scheme which suits you best.
- It is tax-free if your investment remains in the equity fund for more than a year.
Direct Equity Investments
This is how the owner gets the share from the company invested. The members have claimed that the divide between them helped the company’s growth.
A lot of factors are taken into account while investing in equity shares:
- The sector of the company
- Size of the company and investments.
- Investment structures
- The management created records.
For a direct investor, the purchase of stocks depends on the profits from their portfolio. Direct investors buy a few stocks at the start. When the returns from the portfolio are low, the shareholders sell their shares and get out of the debts.
Advantages Of Direct Equity Investments
This is a long-term process. It monitors the growth of the company for an interminable period. The people who invest become the shareholders of the company. This can manage profit and loss within the company shares.
This helps in the increase in the principal amount and brings profit to the partners of the company.
The risk of debt is less, and fewer investors can invest money without fear of obligations.
Disadvantages Of Direct Equity Investments
There are certain disadvantages that direct equity investments come with. The significant drawback here is that it has high risks. Compared to mutual funds, direct equity investments have a higher risk rate.
In direct equity, the shares are bought from a specific company, and the shares’ rate depends upon the company’s growth. You must rely on the company’s growth and performance to profit from your investment.
Though direct equity gives you the possibility of getting higher returns in a short period, there are chances that the shares’ price will change. This change in the price will directly affect your investment. Moreover, trading shares by direct equity is no easy job. Trading is risky and costs a lot. Hence, only people who know how to take such risks invest in direct equity shares.
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