Equity investing has recently become highly popular in India. With growing awareness about financial planning and the facility to Open Demat account online online, more individuals are turning to the stock market to achieve their financial goals.
You can invest in equities through two primary methods – directly buying stocks from the stock exchanges (share trading) or investing in equity mutual funds. While both options have distinct advantages and challenges, choosing the right one depends on your financial goals, risk appetite, and investment style. Let’s dive deeper to understand which one might be better for you.
Share Trading – The Direct Route to Equity Investment
Stocks or shares represent ownership stakes in a company or corporation. Share trading refers to buying and selling stocks of companies listed on the stock exchanges, typically the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
By trading shares, you aim to profit from the price movements of individual stocks. This form of investment provides direct ownership in a company and allows for significant flexibility and control. Depending on your financial goals, market knowledge, and risk appetite, you can invest in stocks for short-term (a few months to a few years), ultra-short-term (a few hours or a few days), or long-term (more than three years).
ETF Trading
ETF trading is another form of share trading. It involves investing in investment funds that pool money from various investors and invest them in stocks, bonds, currencies, and commodities. Like regular shares, Exchange-Traded Funds (ETFs) are available for trading on the stock exchanges throughout the market hours.
Investing in ETFs is a good option for beginners as they offer competitive expense ratios. When you invest in ETFs, you stand to receive a portion of the fund’s profits in the form of interest or dividends.
Advantages of Share Trading
Share trading is highly popular across the world and offers numerous advantages, such as:
Potentially Higher Returns
If done correctly, share trading can provide substantially higher returns. You must have heard of several rags-to-riches stories associated with share trading. The key is to invest in the right stocks at the right time. You need to be aware of the market trends and be able to manage your portfolio actively for the best results.
Full Control
Another benefit of share trading is that it gives you complete control over your portfolio. You can decide which stocks to buy, when to sell, and how to allocate your resources. You can trade shares anytime during the market hours.
Multiple Trading Options
You can adopt a multi-dimensional trading strategy to profit from the share markets. For example, you can allocate a portion of your investment for your long-term financial goals and invest it in blue chip stocks. You can use another portion to gain from swing or intraday trading. With knowledge and experience, you can also try derivatives trading.
Complete Transparency
Stock prices and market movements are transparent and updated in real time. You can constantly monitor the market and make well-informed trading decisions.
Diversification Opportunities
You can create a well-diversified portfolio by adding stocks belonging to various sectors and companies. For instance, you can invest in stocks of companies belonging to the technology, automobile, pharmaceutical, and banking sectors. You can also invest in ETFs and indices for further diversification.
Challenges Of Share Trading
While share trading can be lucrative, it is fraught with challenges. Let’s explore some of them:
High Risk
Share trading is inherently risky due to market volatility. Picking individual stocks requires substantial research and knowledge. Unfavorable market movements can wipe out your entire capital in one go.
Time-Consuming
Active share trading requires constant monitoring of market trends, company performance, and news updates, which can be time-intensive. You must always be on your toes, or you could miss out on opportunities.
Requires Expertise
Successful share trading requires an in-depth understanding of financial markets, technical analysis, and risk management.
Emotional Bias
Individual traders often fall prey to emotional decisions, such as panic selling during a market downturn or overconfidence during a rally.
Mutual Funds – The Professional Approach To Investing
Mutual funds pool money from multiple investors and invest it in a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who aim to deliver consistent returns while minimising risks. When you invest in a mutual fund scheme, you buy specific units based on its net asset value (NAV). You can then sell these units to make a profit.
Investing in mutual funds is suitable for those who do not want to monitor market movements constantly. Novice investors with little or no knowledge of the market can use mutual funds to gain from the equity markets and benefit from professional fund management.
Advantages of Mutual Funds
The advantages of mutual funds include:
Professional Fund Management
Professional fund managers manage mutual fund schemes using their expertise and experience to make informed investment decisions on behalf of investors.
Ease of Investment
Investing in mutual funds is simple and hassle-free. You can invest online via a lump sum or Systematic Investment Plan (SIP). Furthermore, with the help of tools like SIP Calculator, you can estimate your mutual fund returns in advance.
Suitable for Beginners
Investing in mutual funds is ideal for beginners who lack the time, expertise, and inclination to manage their investments actively.
Diversification
Mutual funds allow you to create a diversified investment portfolio. You can invest in equity, debt, or hybrid schemes as per your investment horizon, risk appetite, and financial goals.
Challenges of Mutual Funds
The challenges or limitations associated with mutual funds include:
Fund Management Fees
Mutual funds charge management fees and expense ratios, impacting your overall returns. Additionally, you may incur an exit load if you sell your mutual fund units before a predetermined period.
Limited Control
Mutual funds are unsuited for investors who want complete control over stock selection and investment decisions.
Market-Linked Risks
Like share trading, mutual funds are subject to market risks. However, the impact is often lower due to diversification and professional management.
Tax Implications
Gains from mutual fund investments may attract tax based on the type of fund and holding period. For instance, if you invest in equity mutual funds for more than a year, your returns would be considered Long Term Capital Gains (LTCG) and taxed at 12.5%. Similarly, if your investment duration is less than 12 months, your returns are considered Short Term Capital Gains (STCG) and taxed at 20%.
Share Trading Or Mutual Fund: Which Is Better?
When deciding between share trading and mutual funds, you must consider several factors, including your risk appetite, market knowledge, financial goals, and time commitment. If you have a high-risk tolerance and can manage your investments actively, you can consider share trading. Conversely, you can invest in mutual funds if you want to take a less risky wealth-building route.
You can combine share trading and mutual fund investments for the best results. For instance, you could allocate a portion of your portfolio to direct stocks for higher growth potential and another to mutual funds for stability and diversification. With tools like the HDFC SIP Investment App, you can manage all your investments seamlessly.
