The mood in the economy is great and the story says India is growing. The moment this mood floats in the hearts of Indian investors, discussions and debates kick off on the importance of investing in equities. Sadly, the history says this does not stay long. It stays till the markets are going up and when something drastic happens, people start cursing the markets again.
However, it has to be said that without investing in equities, most of our goals would remain unachieved. Inflation would eat into the meagre returns that our dear FDs, KVPs, etc give out. Hence, we could say that investing in equities is more a compulsion than an option today. Another important discussion in this scenario would be where to invest – Direct Stocks or Mutual Funds? It’s always a big argument since both of these are powerful tools to create wealth. Let’s check pros and cons of both of these and then see which is the best.
- Some stocks can really kick up your wealth creation process. Rs. 10,000 invested in wipro 30 years back would have been worth thousands of crores today.
- You can choose the business of your choice and selectively invest in such businesses which you trust and recognize the potential.
- All investments in stocks are tax free after 1 year. If you sell before 1 year of purchase, there would be flat tax of 15%.
- Since you are investing in few select stocks, you carry huge risk of running into losses if the businesses do not work out.
- If you have limited investment amount, you may not be able to get proper exposure. This happens especially in bluechip stocks whose stock value is already high.
- There is no option to invest in small and equal amounts in the same stock regularly.
- You have to do your own in depth research, though there are tips available everywhere.
- Biggest advantage of investing in mutual funds is to be able to invest in small amounts regularly through SIP.
- You get exposure to various stocks through small amounts.
- There are different types of mutual funds for different purposes. So, variety is never an issue here.
- You do not have to perform huge research since this part is done by the fund manager.
- Not all mutual funds are performers. Some of them only perform when the markets are up but fail to withstand in tough times.
- Some categories of mutual funds are taxable. Only equity funds are tax free after 1 year.
Finally, wealth creation requires combination of both direct stocks as well as mutual funds. However, caution needs to be exercised while investing in these equity instruments. Also, investment has to be for long term. Only then, the real power of equity can be felt. Mutual funds need to be reviewed every 6 months – 1 year. If you are a first time investor, try to stay away from stocks for some time.