Equity, Mutual Fund or Index Fund: Which Investment is Right for You?

Should I invest in equity or in a mutual fund? If you are an investor, I bet this question has struck you once or more. A similar question that leaves investors equally puzzled is whether index funds are a better investment option than mutual funds?

In this article, we’ll compare all these financial instruments and guide you to pick the one that’s best for you.

Let’s start with a brief introduction of these investment choices:

Stocks or equities

Investment

Unless you have a Demat account, you can’t invest in stocks. So open a Demat account today if you are interested. There are two types of brokers. The first is traditional full-service brokers. Banks and brokerage firms fall within this category. They offer 360° investment advice to clients. The second is online brokers. They operate through websites and hardly meet face-to-face.

Your broker will help you no doubt, but help in this context means getting you all the data, suggesting which stocks to invest, etc. The buying or selling decisions need to be taken by you and you alone. Investment can be long-term or short-term. Long-term investments are way safer than short-term ones. Newcomers are recommended to buy stocks, which would give them profit in the long run. Short-term investments are risky. However, if successful, these investments could turn into a financial windfall.

Mutual funds

What’s the difference between equity and Mutual fund?

The money that you invest in mutual fund flow into the equity space. However, the fund is managed by veteran investors who have several years of trading experience under their belt. They use cutting-edge software and data analysis tools to pin on the stocks that’d yield a favorable return in a year or two years or five years down the line.

Also, they invest in a selected number of stocks, not in every stock. They don’t select stocks randomly. They select them after thorough research and analyzing their past performance.

Mutual funds strike many people as an attractive investment option, mainly because they offer a high return. However, the return they offer is conditional, it’s not guaranteed. Mutual fund investors are advised to read the offer document carefully before investing. Because the return policy is mentioned in the document. Investors can expect the return if the market performs well at the time of the maturity of the scheme. Not otherwise.

Two pieces of advice. First, invest in a fund that offers a balanced return, not something that’s excessively high. Second, check who is the fund manager. A lot depends on who the fund manager is. If he is responsible for a previous fiasco, don’t invest in it.

Index fund

Index funds are a type of mutual fund. The difference between a normal mutual fund and an index fund is the latter has a portfolio that tracks a market index. If the index shows a bad performance, so would the fund. S&P 500 index funds are most popular for they draw investment from long-term investors.

Here are some best S&P 500 index funds, according to Investopedia. Their historical performance has been impressive. The biggest USP of index funds is they are relatively risk-free. Regular mutual funds invest in selected stocks, it all depends on how these stocks perform. But S&P 500 represents the whole market.

The market cannot undergo a trend – be it bull or bear – for long. Hence, index fund returns are more or less assured, unless there’s a huge economic meltdown, one that is global.

Which one to select?

This question is bound to occur here as we are done describing all the investment types. Now, it’s not easy to answer the question as no two investors are the same. Every investor is driven by their beliefs, ideas, and preferences.

Generic advice may not be that useful, but still, matter as different people sometimes commit the same mistake. Here are some advice detailed below:

  • A stock may have been lucrative in the past. But don’t expect it to render the same performance in the future.
  • Midcap mutual funds are relatively safe.
  • If the mutual fund distributes the investment equally into equity and debt, it’s relatively safer to invest in it.
  • Index funds reflect the market. The market always recovers after a crash. Hence, if you invest in a crash and wait, the odds of making a gain will escalate.

Ultimately, it’s you who will make decisions for yourself. The points above can only help you identifying investment opportunities, that’s all.

Consult an expert

If you can’t take investment decisions yourself, consult a financial advisor. That person will be knowledgeable enough to advise you on the right things, you need to know. However, do mention him that you know the basics of investing, so he doesn’t have to waste his time explaining things that are already there in this article.

Summing up

Everyone should invest. It makes little sense to store the money. So, go ahead and invest your hard-earned money to earn an even bigger amount. However, investors shouldn’t be emotionally driven or devoid of logic. So, follow the tips given here in this article.

Leave a Reply