In an earlier article, we have seen why you should invest in equities and what the returns from equity means to your overall financial planning.
Today we will see two ways in which we can invest in equities – one is a simple laid-back way in which you see your money multiply over a period of time and the second one involves active participation from you as an investor.
One could go with both approaches or just one of them depending on certain factors which we shall explore. Take any way, if invested intelligently, one is sure to reap riches.
Invest via Mutual Funds
The first and more boring way of investing in equities is through avenues called mutual funds (MFs).
MFs take your money and invest in a number of shares, which they then buy and sell on your behalf to generate profits. These are run by AMCs (Asset Management Companies) or more specifically, fund managers who belong to these AMCs.0
Since the fund manager is a professional well versed with the nuances of the stock market, all you as an investor have to do is invest in the MF and forget about the underlying risks governing the particular shares.
You have to no doubt, monitor your mutual fund from time to time, as you would monitor any other investment.
Through a MF, you can achieve diversification by buying just one mutual fund which would invest in many shares across sectors and different capitalisations.
High returns, safety of investments, diversification and ease of investing are the key salient features of investing in mutual funds. This is more suitable for investors who are passive – that is, who do not actively monitor and churn their investments.
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Direct stock investing
The second and more exciting way into equities is called direct trading – which is same as buying and selling shares of companies directly on the stock exchanges, BSE and NSE. This is more suitable for active investors.
So an an investor, you have the direct responsibility of choosing the stock, analyzing it, buying it at the right price and selling it high to make a gain.
Investors find this more exciting as direct trading tends to give more returns than the MFs and the sheer adrenalin rush it offers is incomparable. You could potentially make a killing in the stock market by timing the market and making a neat profit in a single day.
The lure to quick money is why investors keep looking at the stock ticker all through the day.
All investors do not have the capability of making the right call with stocks; there is a limit of the number of stocks you should have in your portfolio; diversification around sectors and capitalization has to be done by the investor himself; looking through quarterly results to fish out the good and bad ones is his responsibility – all these do look like a tall order for the small investor.
Despite this, most investors prefer direct trading as their investment strategy, though the MF avenue would suit them better. Investing in IPOs is also a favourite in order to make a quick buck.
A combination of MFs and stocks could also form part of an investor’s strategy. Probably this is the best way to get the best of both worlds.
Whatever be the approach, investors need to find out which investment style suits them best and invest according to their goals. They should not avoid equities completely and at the same time should not jump headlong in direct trading.
[…] The best way to make money over such a long period of time is investing in equity. Investing too conservatively in debt instruments will not help combat inflation. Inflation eats your money away and reduces the purchasing power of money. In order to counter this menace, the rate of returns needs to be more than inflation. The only way to achieve that is to invest in equity via mutual funds or stocks. […]