Friday, 31 August, 2007

Stocks or Mutual Funds?

If you are like me with very little time to do your research, you would be in a dilemma at some point or the other. Should you invest in Stocks or Mutual Funds. Well, both have their own benefits and suits persons with different personalities. Let’s dig deeper.

Why invest in Stocks

Stocks move faster than Mutual Funds, both ways. Which in turn means, better profits (and losses).
Stocks may be good investment vehicle for short term or even medium term. But longer term stocks are good Only if the underlying fundamentals are good and the company pays handsome dividends. I know of many of my Friends and relatives whose Parents are actually Living off of the dividends from the stocks that they purchased way back when. Stocks are full of excitement and action because of their day-to-day price fluctuations.

Stocks are much better investment when compared to money sitting in your Bank. After all, the interest that you earn from your bank does not even match up to the current Inflation, leave aside handsome returns. Then what is the point of having money sit in the Bank and even in Fixed deposits?

Stocks are good, but they are extremely risky as well. More often than not, when you buy a stock it starts going down. Hence, stocks are not for weak at heart and one must have good risky appetite when dealing with stocks.
Why should i invest in Mutual Funds

Most safest vehicle if you are not looking to grow rich in a single day.
Though it is said and read across the globe and on the internet that Mutual funds do not pay handsome returns because of their hefty fees/commissions etc, at least in India the story is just the opposite. Mutual funds have safely matched up to the Indices in the past few years.

Mutual funds are not really for short term play as the fluctuations in the NAV prices of a mutual fund is not as drastic as that of stocks.

Ideal investment for Long term growth, College education, Retirement.
Most important benefit of investing in Mutual funds as opposed to Stocks is the amount of time you need to invest researching is cut down by over 95%. Why? Because, you only do your research once, invest in your Mutual Fund and then just sit tight. Whereas, with stocks every time you close your current position, you need to do your research (or as most say, search in forums for tips ) which is not only time consuming but also extremely stressful.

In summary, both investment vehicles are equally good. It all depends on your risk appetite, your investment horizon, your expected returns and the amount of time you have on had to do your research.