The stock market is somehow always a conversation starter – be it office, party, or gym. Some way or other, conversations veer towards if you are not investing in the stock market or not. It is not a crime or lack of financial planning if you are not investing in the stock market. Investing in the stock market is not an inappropriate investment option. However, it may not be a good idea if done without sufficient knowledge and experience. Therefore, as a beginner in investment, here’s why it is wise, to begin with mutual funds rather than the stock market.
1. When it comes to money, knowledge and experience must be prioritised. Investing in the stock market requires years of experience and knowledge about various factors affecting the market and the availability of time. Despite having both, there is no guarantee that you will not lose your money. On the other hand, mutual funds invest not just in the stock market but are also exposed to the money market or other secured instruments that hedge the risk of the stock market. The result is the best of both worlds where one provides return and the other safeguards your investment.
2. Time is of the essence in the stock market. Capital markets always require the ability to understand the fundamentals and technical aspects of each script along with its peer companies, sectors, economic and governmental influences, and more. Each factor requires an immense amount of time to study individually and collectively. In mutual funds, the fund managers along with a team of experts dedicate their time to finding the right investment opportunity for you. The result is a near-stress-free life with the achievement of financial objectives in time.
3. Stock market deals in almost all sectors, thus achieving sector-wise diversification could be possible. However, no matter where you invest, the inherent risk of equity cannot be ignored. Returns on investment via the stock market depend on varied factors. Hence, even though a company, which may be fundamentally strong, could fail to deliver the desired results. Mutual funds invest not only in stocks but also provide an option to invest in bullion market, money market instruments, index funds, foreign market funds, corporate bonds, infrastructure bonds, and more. The result is diversification is achieved from the first instance and stays till the last date of investment.
4. While the above reasons are passive, tax saving benefits may be deemed as active reasoning for investment in mutual funds. Under section 80C of the income tax act, ELSS mutual funds provide you with the option of saving tax. Investment in any company will not result in any tax savings even if the same is a government company or a public sector unit. Whereas investing via ELSS mutual funds will not only save tax on your income but will also provide you with the benefit of earning returns comparable with the stock market. ELSS protects you from tax and provides you with an opportunity to earn handsome returns.
5. A mutual fund is simple and helps overcome psychological burdens. Picking the right stocks might be too cumbersome and when the time to exit arrives, it may require a sufficient amount of psychological strength to overcome the favouritism biases. As a result of this psychological burden, one may err in the entry or exit points of any stock and thereby lose money. There is no such scenario in mutual funds and with the help of Systematic Investment Plans (SIP), one can effortlessly invest by simply enrolling on a bank mandate, and invest based on your comforts.
Investing in the stock market is not a poor investment decision. However, it is wise to choose what is right for you rather than let others decide it.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)
