Some days before my uncle came to my house. When he came to our house, we had a lot of conversation. After that, he asked me, “Ashif, if I want to do some good investment, then in which stocks should I buy?” My uncle is at a very good post in HDFC Bank, but he asked me in which stocks he should invest.
My Investment Strategy
You know, at the end what answer I gave. I told him that he should invest in mutual funds. You can either put money in an index mutual fund and do SIP in it. This suggestion I gave to him. It could be possible that you come to me and I would tell you don’t invest in mutual funds, you invest in stocks. So why I told my uncle to invest in mutual funds and why I would tell you to invest in stocks if you ask me?
My Investment Allocation
I have put money in both things—in mutual funds and a lot of money in stocks. So I put 95% of my money in stocks and whatever money I want to put out of it, 5% in mutual funds. Why I put 95% in stocks and 5% in mutual funds when my uncle asks the same, then I am telling him that whatever money you want to invest, you can put hundred percent in a mutual fund or suggest some names of blue-chip companies you can purchase shares of when there would be some correction. But then also, what was my recommendation to put money in mutual funds?
If you want to know more about Mutual Funds, the Full Guide is here, I have created a full category for Mutual Funds, just click here to go there.
Understanding Stocks vs. Mutual Funds
Now you would have had confusion in it, and most of the people get confused that money in stocks or money in mutual funds. Many people don’t know what both of these things are, what is the difference, and where to put the money. Let’s step by step understand.
Investing in Stocks
When we say about putting money in stocks, very simply you are purchasing the shares of a company.
Investing in Mutual Funds
When you put money in a mutual fund, then there you are directly not buying shares of a company. You are putting your money in a mutual fund, and the fund manager decides where to put your money. For example, if there is HDFC Bank mutual fund, then HDFC would appoint a fund manager who will decide where to put your money.
Control vs. Expertise
Control: When you put money in shares, you have control in your hands. If a share goes down, you can buy it; if a share goes up, you can sell it to book profit. In mutual funds, every month you have done SIP (Systematic Investment Plan) and give money to Asset Management Company. They invest the money, but you don’t have control. The fund manager decides where to invest, which may not be ideal if the market is down.
Expertise: In mutual funds, there is an expert person who knows where to put the money. If you don’t want to put in the time and want to be free, then you give money to an expert. A good mutual fund will have an expert managing it, but you can’t compare returns with the last year. If you are ready to learn and invest time, you can become an expert yourself.
Investment Size and Risk
Investment Size: When mutual funds grow large, they often invest in blue-chip companies to avoid risks. Fund managers invest in large-cap companies as they are safe, but this limits growth potential in mid-cap and small-cap companies. If you invest yourself, you can take calculated risks and invest in smaller companies with higher growth potential.
Returns and Learning
Investing in shares requires learning and time. If you are ready to learn and have the time, investing in stocks might offer higher returns. On the other hand, if you don’t have time and want to be more relaxed but still beat inflation, mutual funds are a better choice.
Recommendation for Uncle & You Guys
Why I told my uncle to invest in mutual funds: He is so busy with his job that he has less time but wants returns more than FD and understands the power of compounding. Therefore, mutual funds were a suitable recommendation. I also told him about some blue-chip companies to directly invest in them.