Before knowing about the difference between mutual funds and direct equity investments, it is essential to know each term. Both mutual funds and direct equity are investment-related terms, and each has its target. While mutual funds are less risky and don’t need much knowledge, direct equity is made for professionals. We will talk about each of them in detail here.
The preferences of people change according to the situation. People always think, which is always beneficial? Which can help them? Whether we can trust this? And we have a lot of solutions to the questions above. This is useful for people who are thinking of investing and saving money through any means. As I ask you the question, the answers will be both of equal ratio. As far as you had enjoyed either mutual funds or direct equity investments than from this article, let’s get to know about another one.
Comparison Between Mutual Funds And Direct Equity Investments
In this article
Mutual Funds Vs Direct Equity Investments
Characteristics Of Mutual Funds And Direct Equity Investments
i. Systematic Management
- In some cases, individuals find it difficult to identify their shares. So, mutual funds offer certain benefits to investors; thereby, it helps managers.
ii. Clearance Of Risk
- The mutual funds are useful in the management of risks at the time of debts.
- They safeguard investors from issues and thereby help them in financial assistance.
Mutual funds have rules of charging fees for the amount instructed by the income tax department. But direct equity doesn’t pay for trading charges.
The individuals have to research the stock buy and sell in direct equity investments. Mutual funds have a manager who takes care of shares. Thus, mutual funds can benefit for normal people and thereby helps in the invested related decisions.
What Is Safer? Mutual Funds Or Direct Equity Investments?
As compared, direct investments can bring high profits over a temporary period. But as far as mutual funds, it is safer, and there is an acceptable amount of profit during the period.
Mutual funds are better than of direct equity investments. With shares, the loss can be even bigger, and dealing with shares is complex. In mutual funds, such problems can’t avoid debts. The mutual is the safest mode to invest money. Thus, mutual funds are the best way to secure and offer profit for the investor’s choice.
The mutual fund has a fund manager who has a lot of experience in managing the company. He should be well experienced in the field of saving the fund from risks. The performance of the fund is tracked, and the analysis is made clear to the public.
The SEBI monitors mutual funds. The mutual funds are very diversified. Even if it is a small amount, you can invest in multiple shares and gain profit later.
The mutual funds have a tax deduction under Section 80C as instructed by the income tax department. But the direct equity doesn’t have these benefits. The mutual funds have you need to research over the shares, and the fund managers manage these.
While investing in mutual funds, we should know that the funds should be managed for more than 5 years so that the fund’s profit is higher. Thus, mutual funds some of the other safe and secure for the people who invest.
Efficient Usage Of Funds And Investments
There are some drawbacks to an extent for both. The efficient utilization of the two depends upon the people. If people are smart enough, we can prevent ourselves from debts.
If we all rectify the drawbacks mentioned, we can become a beneficial investor.
We have to do a lot of study and research on the stock we invest in for the direct investment. But the mutual fund is for beginners and first-timers who don’t have adequate knowledge.
A mutual fund is an organization that collects money from the people who have invested. The money is put into specific types of property and small period loans. The gathered money by the mutual fund is the portfolio. At first, we have to make an investment idea to benefit from mutual funds and make important decisions for it.
To make it clearer, Suppose you are a representative of your class. You collect money for a tour purpose. The class students give money to you. Now, if the money collected is extra, then you give the extra money to the students. In the same way, mutual funds organize the funds and management. As you collect money, the mutual fund also collects money. When you return the money, the mutual funds return the money after the profit is made like that of the initial investment.
Thus, the mutual fund is the safest way to get a good Rate of return. When we choose mutual funds as our investment plan at first, we should go through a portfolio of more than 50 companies. The earning depends on the no. of stocks you invested.
Advantages Of Mutual Funds
There are certain advantages that mutual funds have over direct equities. Some of the major advantages are stated below.
- You do not need to have professional knowledge about mutual funds as the fund managers will manage everything for you.
- You can invest in stocks as low as INR 500. Mutual funds are not too expensive, and the return is quite high
- The fund management fees are low. If you want to trade inequities, you do not have to pay any trading charges or DMAT.
- Risk management is quite good in mutual funds.
- You get to have options for investing in mutual funds. You can choose the scheme which suits you best.
- If your investment remains in the equity fund for more than a year, then it is tax-free.
Drawbacks Of Mutual Funds
Mutual funds have certain secrets. The amount they charge on the investors disclosed and return can be very high for such funds.
Control of the money invested over by the organization is a drawback where certain fund managers are responsible for mutual funds—the investors who want control over the shares are affected by this.
There are no high returns in a short period as that of direct equity.
When we talk about mutual funds, we cannot miss out on the bull and bear period. Bull period and bear period are the two time periods that we see in the market. These two are highly related to mutual funds and are important in various ways.
The bull period is the time period when the price of the stocks is rising tremendously. It means that the economic growth of the country is improving. The bull period is a sign of a good economy and is the best time to invest money in mutual funds.
Bear period, on the other hand, is the period when the price of the stocks is decreasing at an alarming rate. It is the time period when the market is not seeing any growth. It is a sign of a poor economy and is a risky time to invest money.
No doubt, mutual funds come with tons of risk, but you need to be careful with the time period. If you are thinking of investing money during the bear period, when the prices are low, you may be partially right. Firstly, we never know when the time period will change, so there are high chances that you will get profit from your investment during the bear period.
However, there are also chances of loss as we never know how long the bear period might go. How can you recognize these two periods? The bear period and bull period have some specific characteristics.
During the bull period, you will see rapid growth in the economy, a rise in GDP, and an increase in employment. All these characteristics give positive vibes to the people. During the bear period, you can see that the economy is going down; there is unemployment, and people are losing confidence. We never know when the bear period will hit us, as there are no specific reasons for this period’s appearance.
However, the main thing here is that you should know the market time period before investing money. Investing during the bull period is the safest option, as there are fewer risks and high returns. But, investing during the bear period comes with tons of risks. People do invest during the bear period, but after knowing the risks. So, know the time period and the risks before investing.
Direct Equity Investments
This is the method by which the owner gets the share from the company invested. The members have shares that divide between them to help in the company’s growth.
A lot of factors are taken into account while investing in equity shares:
- The sector of the company
- Size of the company and investments.
- Investment structures
- Records created by the management.
For a direct investor, the purchase of stocks depends on the profits from their portfolio. Direct investors buy a few stocks at the start. When the returns from the portfolio are low, the shareholders sell their shares and get out of the debts.
Advantages Of Direct Equity Investments
This is a long-term process. It monitors the growth of the company for an interminable period. The people who invest become the shareholders of the company. This can manage profit and loss within the company shares.
This helps in the increase in the principal amount and brings profit to the partners of the company.
The risk for debts is less and disclosed fewer investors could invest money with no fear of debts.
Disadvantages Of Direct Equity Investments
There are certain disadvantages that direct equity investments come with. The major drawback here is that it has high risks. As compared to mutual funds, direct equity investments have a higher rate of risks.
In direct equity, the shares are bought from a specific company, and the shares’ rate depends upon the company’s growth. Here, you have to depend upon the company’s growth and performance to get profit out of your investment.
Though direct equity gives you the possibility of getting higher returns in a short period, there are chances that the shares’ price will change. This change in the price will directly affect your investment. Moreover, trading shares by direct equity is no easy job. Trading is risky and costs a lot. Hence, only people who know how to take such risks invest in direct equity shares.
Direct Investments And Partners
The major role of direct investment has partners who invest money in the company. Suppose you may have a question. What happens when one partner isn’t able to pay the money? I say the answer to this via an example.
Your friends are planning to go to an amusement park. You also have the interest to visit it, but you have a shortage of money. What happens? Your friends help you share their extra money to take you too. This, too, happens indirect investment when one of them cannot pay on time, the other shares extra money to clear its debts.
Direct investments encourage partners, not investors. The control goes to the partners of the company, as mentioned above. Thus, direct investments can be helpful in how there is no control over the partners and buying and selling depending upon the company’s decisions.
Direct investments are a risky process. You are the company owner the price of the share you buy increase or decrease depending on the time of investment. So, when there is a fluctuation, there is a decrease in share value.
Tips To Become A Successful Investor Of Direct Equity
- The company should have a nice growth and have a good profit over the shares invested.
- Time plays a major role in the trading of stocks. So, one must have a piece of good knowledge in determining the value of the stocks.
- The company should not have a short-term investment plan. The growth should influence other people to invest money.
- We should have a growth visible for a span of fewer than seven years.
Thus, becoming a direct investor requires a lot of skill and analytics on the stocks you will invest in.
1. How do mutual funds benefit the lives of people?
2. Direct investments can bring out much profit in business. Explain.
3. How are mutual funds better than direct equity investments?
ii. Any person is free to invest.
4. Ramesh is a new investor in mutual funds. How do you guide him about the mutual fund and its guidelines?
ii. Next, he should ask certain people about the best fund in his area.
5. What is the major drawback a mutual fund has while a direct investment doesn’t?
6. How many types of funds are present in mutual funds?
7. Mutual funds or direct investments, which one you consider better?
8. The uses of direct investments
i. Bring profit in a brief period.
ii. The company controls investments.
9. Jayant is a partner in his company, which works by direct investments. He is not familiar with the shares of the company. Can you help him out?
ii. He should also be wise to save his bank from debts.
10. How can you start mutual funds among people?
ii. Advising people about the benefits of mutual funds.
11. Mutual funds are the best way to save from risks. Explain.
ii. The funds are beneficial for the first investors and rural people who do not know investments.
iii. Mutual funds explain its function and the way of investments through guidelines for the people who invest.
iv. Funds have certain lifetime plans so that people can be active members of the fund and help in the fund’s growth.
v. Funds can prevent debts for investors.
The two have beneficial motives over people as far as suggested, mutual fund or direct investment depends on the people’s situation. As an investor, it is best to enroll in mutual funds and save themselves from debts. But as a company partner, the direct investment can bring even more profit than funds do. If you are an individual and have the time to research, it is better to invest in direct equity. Else you want safe management of stocks; then it is better to invest in mutual funds. Thus, I conclude that people should be wise to decide and benefit their lives from any of these schemes.