Should you invest in Mutual Fund's or Stock market?

When you have access to too many things, it's natural that you can get confused. In the same way, when investing, when you have different mediums for the investment you wouldn't be sure of where to invest and how much to invest.

Today we will be looking into two such popular mediums are Mutual Funds and the stock market. Both have gained popularity over the years but people can't decide on this. So we will be discussing in detail which is better and where to invest.

(Source: Tarrakki.com)

A mutual fund is a type of organization that collects money from different investors, pool it together and invest in different assets. This is done by an expert in this field referred to as a fund manager. He is knowledgeable and knows where to invest and how to invest. That is you have someone professional and experienced in investing to guide you in the process.

He watches the market and makes sure that the money is in the right place. Be it in the stock equity, debt funds, bonds, securities, he identifies the asset classes and appropriately allocates the sum.

The stock market on the other hand is a place where you can buy and sell shares of publicly listed companies. How it works is, for example, I started a private limited company that manufactures clothes. Then you make a valuation of the company based on its assets, infrastructures, and so on and you divide it into several shares and decide a value for it, say 10 shares worth Rs.10,000 each. That is its value is Rs.1,00,000. The company decides to sell 30% of its shares and that is when investors come into place and buy those shares depending on its valuation.

This is how the stock market works. It's not easy as it may sound and is quite a big fish that is only meant for people who have diverse knowledge and experience in this field. Otherwise, there are chances that you can face a huge loss.

I hope that now you have got an idea of what mutual funds and the stock market are and how it works. Now we will see where to invest and which is better. I would suggest Mutual Funds for beginners and people who lack expertise and knowledge in the field as:

• Diversification

In Mutual funds, the money you invest is diversified, that is, it is invested in different asset classes and not a single security is purchased. This itself reduces the risk as there are fewer chances of facing a loss.

• Economies of scale

Since different people pool their money and are invested, the amount is spent together in making investments. Therefore there is more return. For instance, when you buy fruits from a retailer the price is more than what's with the wholesaler. In the same way, as the fund manager buys assets in bulk, you can get them at better rates.

• Professional management

Mutual funds have the advantage of being managed by an expert or a professional. So we don't have to worry about it, he collects and pools the money and makes profits and he distributes the dividends to the investors. Also, the stock price may go up and down, he who is an expert at this knows the right entry and exit point.

The only drawback with Mutual funds is that since it's being managed by a professional he is paid for the management expenses. That is he takes a portion of the dividend. It's not more than 1- 3% of it. Also, we can't say that it's too much, the profits he makes are immense and he deserves to have that portion.

It's best to invest for the long term in Mutual funds as it's safer. There can be dips and fluctuations, so to avoid loss, invest for the long term as it will go up gradually and you won't regret the decision.

Stock markets can yield good profits. We all know Rakesh Jhunjhunwala and Radhakishan Damani who have earned and have become billionaires through trading in the stock market. When we look at the top there are only a very few who have achieved and many have lost and some still struggling. This is mainly due to a lack of skill and proficiency in the stock market. It is different in the case of Mutual funds where we hire a professional and he will make decisions for us.

I would say if you have the expertise and the enthusiasm to explore you should go for the stock market but ensure that you have the former in abundance before you step in. I suggest so as it is certain that stocks can deliver you multi-bagger returns and even more in the long run.

Wherever you are investing make sure that you don't invest or go for the other option due to technical issues or other difficulties, it should be purely based on your goal. You should have a goal and invest in a medium to meet that goal. Therefore invest based on your need.

Always remember "Just buy something for less than it’s worth.”

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Author - Tess Bobby

Content Writer at Escribo.