Investing in the markets directly vs. investing via fund managers: All you need to know
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The equity market has been having a record-breaking bull run this year. Nifty and Sensex broke their own previous records and touched new highs. All of this buzz has put the stock markets in the limelight, and many previously conservative investors are showing greater willingness to invest in equity.
However, whether you're a recent convert or whether you've always been interested in the equity market, there is one dilemma you will undoubtedly face when you are planning your equity investments.
And that is the question of directly investing in the market vs. investing through a fund manager.
In other words, direct equity vs. mutual funds.
Each investment strategy comes with its own advantages. And here's everything you need to know to resolve this dilemma.
What is direct equity investing?
Direct equity investing is exactly what it sounds like. It involves investing directly in the stock market. To do this, you need to open a demat account with a stockbroker. And once you buy the equity stock of one or more companies and hold those stocks in your demat account. There are two ways to invest in the equity market directly.
Investing in the primary market
The primary market is where companies put their shares up for sale to the public for the first time. In other words, it is an Initial Public Offering - or an IPO. You can apply for IPOs via the primary market directly.
Investing in the secondary market
The secondary market is where shares of listed companies are traded on stock exchanges. In India, we have two major stock exchanges - the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). You can buy the shares of listed companies through these exchanges.
What are the advantages of investing in the markets directly?
Investing in the markets directly comes with the following advantages.
- You have a greater degree of control over your investments.
- You can pick and choose stocks more easily, since individual stock selection is possible here.
- Liquidating your investments is easier, since you can directly sell your holdings in the secondary market during the market hours.
Direct equity investing: Whom is it for?
Direct equity investing involves a lot of careful planning and decision making. You need to select the stocks yourself, decide at what point to buy them, how long to hold them for, and when to sell them. It also requires you to time the market smartly.
All in all, since there is a great deal of research and planning involved, direct equity investing may be ideal for you if you are a seasoned investor with some prior experience in the stock market. If you are a beginner, you may find it challenging to handle the nuances of direct equity investing. Fortunately, a fund manager can help you out here.
What does it mean to invest via a fund manager?
Investing via a fund manager essentially means investing in mutual funds. Mutual funds are investment options where the funds from different investors are pooled together. These funds are then used to buy different assets or securities, based on the type of mutual fund.
In the case of equity mutual funds, a vast majority of the collective funds are used to purchase equity shares. The rest of the money is used to diversify the mutual fund portfolio by investing in debt, money market instruments or other assets.
There are different kinds of equity mutual funds too. For instance, large cap equity funds primarily invest in the equity stocks of large cap companies. Similarly, there are mid cap equity funds, small cap equity funds and even multi cap funds.
So, who decides which stocks to invest in and when to rebalance equity funds? Here's where fund managers come into the picture. These experts are seasoned professionals who manage the funds on behalf of the investors. They make all the decisions about buying, selling and holding the assets in the mutual funds.
What are the advantages of investing via a fund manager?
If you choose to invest in the markets through mutual funds, a fund manager generally handles your investments for you. This investment strategy comes with its own benefits.
- You get to experience the advantages of the fund manager's expertise.
- Your investment portfolio is already inherently diversified to a certain extent, since mutual funds invest in different equity shares as well as a few other asset categories.
- This option comes with lower risk than direct equity investments.
- There are also tax-saving mutual funds called Equity Linked Savings Schemes (ELSS) that help you reduce the burden of taxation.
Equity mutual fund investing: Whom is it for?
Investing in equity mutual funds via fund managers may be best for you when you are a beginner just getting started with your stock market journey. That said, it may also be the ideal course of action if you are generally busy and have little time to study the markets and plan your investments. Additionally, the expertise of a fund manager can also come in handy if you are not quite well-versed with how the stock market functions.
That sums up the debate on direct equity investments vs. investing via a fund manager. However, do keep in mind that you can always choose both courses of action too. Your portfolio can have a mix of direct equity and equity funds, and you offset the risk associated with these investments by investing in other asset classes like debt instruments, gold and money market instruments.
Read next: HOW TO INVEST IN EQUITY THROUGH ULIPS
If you want to club the dual advantages of insurance and market-linked equity investing, ULIPs may be just the product you're looking for. We have a blog that tells you everything about how you can invest in equity through ULIPs.
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