When you start doing research online about which stocks to invest in and their returns, you mainly do your fundamental analysis and check the historical performance of the company. But, at the same time, when you give a look at index data, you will find some different returns of the same industry whose stocks you are planning to buy.
It happens because of their industry performance versus company performance. Now, the question is which one is suitable to invest in when index funds also have invested in the same companies that you are planning to buy?
Before jumping into the 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 particular amount of money either through a SIP or 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-constructed portfolio. For example, NIFTY 50 or Sensex.
Individual stocks
When buying single stocks from various industries by doing your own research can be known as investing in individual stocks.
Which one suits you the best?
Your investment decision should be based on considering the above-mentioned factors.
Knowledge
If you have adequate knowledge of analysing a stock, making risk-based decisions, having financial goals, and understanding the concept of diversification and asset allocation, then you can go for the individual stock picks method and create your own set of the investment portfolio.
But, if you are new to the investment market and willing to get a decent amount of return on your investment, then it would be best if you invest through index funds, as you do not have to take care of the diversification of your portfolio.
Risk-based investment
If you are willing to take a high risk, then you can invest via individual stocks by doing your own research. When you invest directly in stock, you expose yourself to various internal management risks, but if you invest in index funds, an individual company’s performance won’t affect your investment significantly. It will help you minimise your risk and maximise your returns. Risk profile could be a decision-making criterion of making between index funds and individual stocks.
Industry benchmark
When you pick a stock you have to compare individual companies in evaluating the performance, and industry performance as well. If you are already working in the industry and know how it works and what are the potential returns, it would be best to invest in emerging companies, as it will help you in creating wealth.
In the case where you do not have the time and expertise to make a comparison between chosen companies and other companies in the industry, index funds can help you out. It will give consistent returns, and protect you if any company breaks down.
When it comes to investing, it is essential to have basic knowledge of market-linked products, if you are creating an investment portfolio on your own. Index funds help you in making investments with minimal knowledge of stocks. Make your investment decisions informed so that your hard-earned money does not suffer in future.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
