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Stock vs Mutual Funds vs Index Funds: How Should a Beginner Invest in equities

Nadim's parents have just given him a lump sum that he wants to invest in stocks. He has been studying the market and the speed with which stocks recover even after a correction. His father suggests that he invest in mutual funds through SIP. However, his friends urge him to consider some of the best past performing funds. As a beginner, these ideas can help you buy a mutual fund, but success is not guaranteed. Also, he is eager to see if there is any solution to his total savings. Everyone agrees that choosing mutual funds based on past performance is the wrong approach, but most advices were based on the same thing.

All stocks, mutual funds, and index funds have their benefits, and with the right guidance, Nadeem can make the most of them too. Investing in individual stocks can give you a greater level of control over his portfolio, as he can choose to allocate it based on a specific industry and exit quickly once he makes a big profit. Mutual funds will help him easily diversify with a very small investment.

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In mutual funds, a dedicated fund manager who understands and oversees the Indian markets actively watches so inexperienced investors don't have to overwhelm them. Financial mutual funds make it easy for rookie investors to follow a disciplined investment method. An index fund is a mutual fund in which the fund manager does not actively choose a portfolio of stocks, but rather is a replica of an index such as Nifty 50. The advantage of an index fund is that its portfolio is predictable and has a lower cost. Therefore, Nadim benefits from diversification at a lower cost.

He might consider creating his equity portfolio, with strong companies and mutual funds. But how do you do this? It is not feasible for a newbie like Nadim to examine mutual funds and choose which one to invest in. This is the job that his advisor can do the best. However, he should not be expected to blindly follow someone's advice. What he needs is an understanding of the process involved in making recommendations and enough transparency to know that due process has been followed. This will allow you not only to invest with confidence but also to stay invested. For stocks, Nadeem can check how they are rated based on their 10-year performance, future outlook, and expected return on equity. For mutual funds, he can think about their investment style (momentum, quality, value, small capital, etc.), past performance (compared to other funds), volatility, and risk-adjusted return.

Enthusiastic investors like Nadim need to invest large sums and monthly savings in stocks, mutual funds, and index funds. Also, he needs to manage this portfolio as the market goes through its ups and downs. He needs to do this with some understanding of the process and not act on random recommendations.

Also Read: Mastercard to allow cardholders to transact in cryptocurrencies

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