Last Updated on December 22, 2023 by BFSLTeam BFSLTeam
Today, with online services available at your beck and call for everything from shopping to investment, it is easy to make hasty, and sometimes, incorrect decisions. While investing, you cannot afford to make the wrong investment decision as your money is on the line. With so many channels for investment and a variety of investment products at your disposal, where should you invest your capital in order to build it? The three predominant (but not the only) ways are investing in equity (stocks), mutual funds, or gold. These are common investment options for many Indians, but you should invest aligned with your own financial goals and risk appetite. It’s important to grasp the pros and cons of each investment product you explore to come to an informed decision.
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Equity or Stocks
The stock market is a crowd-puller where investment is concerned and many people get attracted to its potential for earning high returns. While this may happen, there are also high risks involved. Investing in stocks lets you buy stocks of companies directly, and makes you a shareholder in the company you invest in. This means you get to partake in the company’s actions, like voting, for instance. The huge advantage of investing in stocks is the possibility of high returns. However, to increase your chances of high gains from the stock market, you have to be a skilled player and do adequate research before you buy stocks.
Additional Read: Why Portfolio Diversification is Crucial?
The reason why so many investors may shy away from the stock market is the potential for great risk. With many uncertainties and volatility in the prices of stocks, the stock market may not be a good idea for someone with a low-risk appetite. Additionally, after you invest, you must keep a close watch on any fluctuations and market trends. So, if you think you have the abilities and mindset to get into equity investing, you can start off with small amounts, and try to mitigate your risk until you get the hang of things. Researching companies is always a must before you invest in them.
Mutual Funds
Mutual funds have become a popular channel of investment for a large number of Indians in the last few years. They offer a balanced way to invest and diversify your equity or investment portfolio. They have many perks, but they have some disadvantages too, depending on your unique risk appetite and financial goals.
Among the benefits of mutual fund investment is the fact that mutual funds offer beginners, with a possibly low-risk appetite, a chance to get exposure to investing in different kinds of securities like equity or debt. Essentially, a mutual fund may be described as a kind of trust in which money from several investors is pooled together and invested in different securities like stocks, debt instruments, etc. The main advantage of investing in mutual funds is that they offer you a chance to diversify your financial portfolio, as your capital may be allocated to several companies (even in different sectors). This spreads your risk, so if one company shows underperformance, you won’t stand to risk so much. Additionally, mutual funds are managed and run by fund managers, professionals who are experts in asset allocation and fund re-allocation. You don’t have to really keep an eye on this kind of investment on a daily basis.
Additional Read: Difference Between Shares and Mutual Funds
As much as a mutual fund may be tempting, it has its cons. Some fund houses charge high fees (as your fund is managed by a professional). Apart from this, you have restricted control over where your capital is being allocated as this is dependent on the fund manager. Another thing to note is that there are several categories of mutual funds – some invest in equity majorly, while less risky funds may invest equal amounts of capital in equity and debt. Still others, with minimal risk potential may invest capital majorly in debt instruments. Another aspect to note is the confusion you may face between a mutual fund and exchange-traded funds or ETFs. Let’s delve into this before we talk about gold investment.
Mutual Funds and ETFs – The Difference
You already know what a mutual fund is, so you only have to learn about an ETF or an exchange-traded fund. ETFs are basically funds that trade live on exchanges, and they track a particular index. With an ETF, you get a collection of assets that you may buy and sell during the trading day (market hours). Their value reflects the NAV, or Net Asset Value at the close of the trading day. ETFs are related to low costs and liquidity.
Additional Read: Financial Literacy
Gold Investment
Indians need no introduction to the metal they have loved for centuries – we are talking about that ever-sparkling precious metal called gold. Traditionally, gold is considered auspicious as an investment and a safety net against inflation. It has a high degree of liquidity and its value remains relatively stable compared to other investments, like stocks, for instance. It has a global appeal and demand and it can be sold anywhere and at any time. Additionally, as it is a steady asset, its value goes up when the economy is down as more people get drawn toward its safe qualities.
With all the advantages that gold has, there are some disadvantages too. Physical gold has to be stored safely (in a locker which has a high fee attached) and if held in large amounts, you may have to insure it. There is always the threat of theft or loss when you hold physical gold. Apart from this, it is difficult to ascertain the purity of gold, unless it is certified and this may take the cost of gold products up. The challenges of holding gold for investment purposes can be eliminated if you invest in digital gold or Sovereign Gold Bonds, which are government securities that earn you interest.
Choose with Care
It is vital that you opt for your investment instrument with care. You must assess your own unique financial goals and investor attitude before you opt for investments that come with their pros and cons. You should also aim to diversify your portfolio and mitigate your risk. If you can afford to take risks, you may like equity, but for a more balanced outlook, mutual funds are preferred. Finally, if you want an almost guaranteed safety net and are traditional in your approach, gold may be the way to go.
Additional Read: Financial Planning Guide
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only.
