One of the common, yet quite tricky choice involves choosing between mutual funds for beginners or directly in equities. Both mutual funds and stocks have their own set of pros and cons.
Understanding mutual fund basics and stocks
Mutual fund (mf) meaning is quite simple. It is a financial vehicle that pools the money of numerous investors to further invest in securities such as bonds, stocks, money-market instruments, etc. It is managed by a professional known as a fund manager.
Stocks, also known as equities, are a type of securities that offer stockholders a share of ownership in a company. People buy stocks for capital appreciation, dividend payments, and the ability to vote shares and influence the decision-making committee of the company.
Let’s take a look at mutual fund guide and why you prefer these investment vehicles than direct investment in stocks:
- Professional Management of Money:
Leveraging the expertise and knowledge of a professionalfund manager to earn virtuous returns is one of the primary reasons for investing in mutual funds for beginners.
Investment in stocks without prior knowledge or experience the working and know-how of financial markets can prove to be disastrous and have the potential to drain away one’s savings easily. Hence, it is advisable to invest in mutual funds if onedoesn’thavea thorough knowledge of the markets and wishes to keep their money in safe hands.
Unlike direct investment in stocks that invest in individual equities, mutual funds invest inmultiple asset classes to hedge the investment portfolio during raging market conditions. Remember, even equity-oriented mutual funds invest a portion of their total corpus in low-risk securities or fixed-income instruments for market risk mitigation.
Purchasing and selling stocks require ample time and formalities which are absent in investments in mutual funds. In case of mutual fund investments, these formalities are done by the AMC (Asset Management Company) that manages the fund, for which they charge a nominal fee.
Moreover, mutual fund investments do not require the investor to time the financial market regularly. They can just keep the money invested in the mutual fund scheme for a long duration and earn decent returns.
- Tax-Saving Benefits:
Income generated from equity investment is taxable at the hands of the investor. However, there are specific mutual fund schemes that allow you to avail certain tax-saving benefits. Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds where investment upto ₹1.5 lakh is eligible for tax deduction under Section 80C of the Income Tax Act, 1961.
- Overseen by the market regulator:
Unlike stocks, mutual fund houses are subjected to certain scrutinies and restrictions by the national market regulator-Securities and Exchange Board of India (SEBI).
If you are still unsure about how to invest in mutual funds for beginners, seek the help of a professional. A mutual fund expert will simplify the mutual funds meaning and types for you to make an informed decision. Happy investing!