Investing in Share market or mutual funds
Which investment is better?
If you are a beginner, you may fall into the confusion of which investment is safe: investing in the share market directly or mutual funds? Which gives you better returns? If you have these doubts, read this entire article to find out the answer. In this article, I am going to explain in detail about investing in the share market and investing in mutual funds, and then I am going to compare their advantages and disadvantages.
Investing in Share market directly
Investing in share market means you are analysing a company’s growth and you predicted that the company will gradually grow for the longer period of time. Once you predicted, you have to buy the shares of that company and keep it in your portfolio for the longer period of time.
If your prediction was right, the company would grow and your share value will also increase. So you will get profit. On the other hand, if your prediction is wrong, you may ended up losing money.
Investing in mutual funds
If you don’t know how to predict or if you are afraid that you will lose money, you can go for mutual funds. In mutual funds, your money will be handled by the financial experts who are going to invest your money on behalf of you. In return, they will charge you a fee.
But if you are a complete beginner, which is better for you? I will tell you what are the mistakes I made when I was started my investment journey. Surely investing in equity funds directly is a much better choice when compared to mutual funds. But you should know how it is better.; So I will explain you why investing in share market by yourself is much better than investing in mutual funds. Also I will teach you how to split your fund and invest correctly.
How Mutual fund works?
A Mutual fund company will collect money from several people who are willing to invest their money but do not have much knowledge about investment. The company will assign 2-3 fund managers and the fund manager will invest your money on behalf you you.
In Mutual funds, the fund manager usually disclose their strategy, where they will invest your money, how much returns we can expect and how much risk involved etc,.
So you will select the mutual fund which is suitable for you and you can start investing for a long term.
Advantages
- Your money has been handled by the financial experts who have handled millions of money in the past. So if an experienced expert handles your money, your money will be in safer hands. Because most of people don’t know how to handle money.
- The fund manager will split your money and invest in to different companies from the different sectors, bonds, commodities. So you will have excellent diversification in your portfolio.
- The fund managers are required to disclose their holdings, performance and fees regularly to the investors which means you will get transparency and so mutual fund considered to be a safer investment.
Even though everything seems good in mutual funds, there are so many disadvantages in mutual funds, let’s discuss some of them
Disadvantages
- The main disadvantage of mutual fund is they will charge you various fees such as management fees, operating expenses, and sales charges (loads) and these charges will minimize your returns overtime
- Since your money has been handled by the fund manager, you don’t have the control over the portfolio. So even if you want to add some stocks manually in your mutual fund portfolio, you can’t do it.
- If the fund manager having a lack of skill in investment, they may invest your money into the loss making company so the amount of market risk in mutual fund will be similar to the investing in equity funds directly.
How to choose a correct mutual fund?
- Mutual fund company usually disclose the amount of risk they are going to take. They will mention it as low risk, moderate risk, high risk etc,. If you are investing in high risk mutual funds, it doesn’t mean it will give you high returns. It is always advisable to consider moderate risk or low risk mutual fund.
- You should check the fund size, if the fund size is very low, you should consider that mutual fund as a red flag.
- The most important analysis you have to do is you should know about the fund manager. You should know, how much experience your fund manager have also you should know whether the fund manager is skilful or not.
If you decided to invest in mutual funds, I recommend you to read my dedicated article about mutual funds.
Now we will talk about equity investment. After that we will compare mutual funds with equity.
Equity investment
Equity investment means, you are analysing about a company of your own and buying the company shares in share market and hold it in your portfolio to make profit.
But how do you know how to analyse a company?
In order to analyse a company, you have to do some research. The analysis are technically called as the fundamental analysis. If you did the fundamental analysis correctly, you can analyse a company perfectly.
How to analyse a company?
- Before analysing a company, you must know in which sector, the company is operating. Examples : Telecom, IT, Banking etc,. What is the performance of that sector in your country? If you invest a company in a wrong sector, you will lose your money.
- After analysing the sector, you should see some technical factors such as promoters holding, company’s debt, past performances etc,.
- After that, you much check the company’s P/E ratio. A stock with a P/E ratio of less than 18 is considered a safer investment, while a ratio between 18 and 25 is considered a fair price. Anything above that is considered an overvalued stock.
- Then you should analyse the company’s competitors performance and their upcoming projects.
To get these data, you have to check the company’s balance sheet.
Since I already written a complete article about fundamental analysis, I have just given a small explanation about fundamental analysis. I recommend you to check how to do fundamental analysis here
How to split your money and invest?
If you want to make some good profits in investment, you must think about the future. You must invest in the sectors which is really having a bright future. Most importantly you must split your money and invest in to different companies in different sectors so that you will have diversification. I will explain you with an example.
Let’s assume you have $1000.00 for investment. You must see which sectors having a bright future.
Personally for me, Artificial intelligence, Electric vehicles and Green energy will going to have bright future. So I will invest my 50-60% of money in these sectors.
First I will take 15-20 % of.my money for EV and check what are the companies that produce EV. I will check their company’s website and try to find the upcoming projects. After that I will take all the balance sheets of the companies who are producing EV, I will do some fundamental analysis then I will split my money and invest in companies who are producing EV. I will investment high money for the company which is fundamentally strong and I will buy some small shares, if the company is weak.
Similarly I will do analysis and split my money and invest in companies which is producing greener energy and also do the same for AI.
Once you invested your 50% of your money in top 3 sectors, you must invest 25% of your money in index funds like s&p 500.
And then you should invest 15% of your money in IT sector and banking sector. You must analyse which company is fundamentally strong and analyse.
After you invested your 90% of your money, you may buy other company’s shares with remaining 10% of money or you can invest in other stream such as money market and bonds.
Advantages of equity investment
- If you invest your money directly, your entire portfolio is in your hands. So even if you incorrectly invested your money in some companies, you can exit anytime and invest in correct companies.
- Since you are investing on your own, you need not pay fees or hidden charges to anyone and you will earn your full profit.
- Even if you did some mistakes in the beginning, you will get experience and so much knowledge about economy, which will make you a long term successful investor.
Disadvantages of equity investment
- If you did a wrong analysis about a company, you may lose your money.
- If you don’t know how to split or how to handle your money, it will give you loss.
- Equity investment will test your patience and skill level. If you are too emotional, you will take wrong decisions.
Who are suitable to invest in mutual funds
- People who have no knowledge and also no interest in share market and their only intentions is to get some returns for their money can invest in mutual funds.
- People who are not willing to learn about share market or the people who are not good at money handling can invest in mutual funds
- People who are so busy and do not have enough time to do fundamental analysis, can invest in mutual funds.
- People who are not having confident about their analysis may also invest in mutual funds
Who can invest in Share market directly
- People who are willing to learn new things and wants to improve their financial knowledge can invest your money directly in share market.
- People who have enough time to do research and fundamental analysis about a stocks can invest in equity funds.
- Alternatively, if you are not confident about your analysis can invest your funds in index funds like s&p 500 for some times until you develop your skills.
Comparing Mutual funds with Equity
- Since your money has been handled by the financial experts in mutual funds, it may be better especially if you have issues in money handling.
- If you don’t have much time to do fundamental analysis or not trying to learn about stock market, investing in mutual funds will be better for you.
- Mutual funds will have so much fee and hidden charges so if you want better returns or higher returns, investing in equity will be better for you.
- If you really want to gain knowledge and also willing to become a long term investor, equity investment will be the perfect choice for you.
Both mutual funds and equity funds having some advantages and disadvantages, I personally believe that investing in stock market directly makes you a better investor. If you are investing directly, you may face some losses at the beginning but it is totally fine.
In order to become a successful investor, you must gain knowledge and develop skills. You should not depend on anyone. Take 3-4 hours a week and research about a sector and some companies. If you are consistently doing this for a year, you will gain so much knowledge about economy which will make you a better investor.
On the other hand, if you already have a good business or good career in some other field and the intention is only make some small money, you can invest in a safer mutual fund. Don’t forget to conduct some research before investing.
Useful links
- Read my complete comparison guide about investment vs trading.
- Read my dedicated article about mutual funds
- Read my detailed guide about fundamental analysis
- Very useful article from investopedia about psychology of investment
- Read this article from the Harvard school to understand how to read balance sheet
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