Which one is better investment choice?

When you start researching stocks to invest in and their returns online, you primarily do your fundamental analysis and check the company’s historical performance. But at the same time, when you take a look at the index data, you will find some different returns from the same industry whose stocks you plan to buy.

It happens because of the performance of your industry versus the performance of the company. Now, the question is which is the right one to invest in when index funds have also invested in the same companies you plan to buy?

Before making a decision, let’s understand what index funds are.

Index funds

An index fund is a type of mutual fund in which you can invest a certain amount of money through a SIP or a lump sum. The index is created by selecting a few companies (known as constituents) based on specified criteria, which helps investors invest in a pre-built portfolio. For example, NIFTY 50 or Sensex.

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Individual stocks

By buying individual stocks from various industries by doing your own research you can learn how to invest in individual stocks.

Which one suits you best?

Your investment decision should be based on considering the factors mentioned above.

knowledge

If you have adequate knowledge of how to analyze a stock, make risk-based decisions, have financial goals and understand the concept of diversification and asset allocation, you can opt for the individual stock selection method and create your own set of investment portfolio.

But, if you are new to the investment market and willing to get a decent return on your investment, it would be best if you invest through index funds as you don’t have to worry about diversifying your portfolio.

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Risk-based investment

If you are willing to take a high risk, you can invest through individual stocks by doing your own research. When you invest directly in stocks, you are exposed to various internal management risks, but if you invest in index funds, the performance of an individual company will not significantly affect your investment. It will help you minimize your risk and maximize your returns. The risk profile can be a decision-making criterion between index funds and individual stocks.

Industry reference

When you pick a stock you have to compare individual companies to assess performance and also the performance of the industry. If you are already working in the industry and know how it works and what the possible returns are, it would be best to invest in emerging companies as it will help you build wealth.

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In case you do not have the time and experience to make a comparison between the chosen companies and other companies in the sector, index funds can help you. It will give consistent returns and protect you if any business goes bust.

When it comes to investing, basic knowledge of market-linked products is essential if you are building an investment portfolio on your own. Index funds help you make investments with minimal stock knowledge. Make informed investment decisions so your hard-earned money doesn’t suffer in the future.

Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com

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We explain benchmark index tracking ETFs.

First published: December 13, 2022, 8:07 am IST

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