Is it better to invest in stocks or investment funds?
Finance | 09.07.2016
This is a question many people ask themselves when considering different investment alternatives.
If you are taking your first steps in the world of finance, you may find this blog entry useful.
The first thing you should do is know yourself. Ask yourself the following questions: what level of risk am I prepared to take? What knowledge do I have of financial markets? Will I have the time to keep up-to-date with financial markets?
Be honest with yourself. This assessment will give you an answer as to whether you should invest in stocks or investment funds. If your knowledge of the stock exchange is limited and you don’t have sufficient financial expertise, perhaps investing in shares on your own is not the best option.
On the contrary, investing in funds allows you to entrust professionals with the management of assets that match your investment profile.
The second question you should ask yourself is whether you need a regular income from your investment.
For some people one of the advantages of buying shares is that you can receive an income through the payment of dividends without having to withdraw your investment. However, this requires that you choose a solvent company that pays out dividends on a regular basis.
It is also true that this advantage is not exclusive to shares, as there are funds that also pay out dividends, although most of the time the dividends are accumulated in the fund’s value.
The third question you should ask yourself is what level of liquidity you want to maintain in case of an emergency. In other words, how easy will it be to convert your investment into cash.
In terms of liquidity, it is easier to cash in shares than investment funds. You can sell shares instantly as long as the stock market is open for trading.
In the case of an investment fund, liquidity is not immediate (it may take 1 to 5 days for the money to reach your account) and in some cases, a liquidity window is required (as in the case of some guaranteed investment funds in which certain dates or milestones are set to cash in the fund without incurring redemption fees or early exit charges).
A fourth aspect that should be taken into account is how you want to receive the income. There is a difference between receiving the return on an investment through successive purchases/sales of securities (i.e. receiving net capital gains through the purchase and sale of securities) and receiving the income through one or more payments into an investment fund. In the latter case, you can virtually forget about the investment until you decide to cash it in a few years later.
Fifth, you should ask yourself how the investment will affect you from a tax point of view, depending on what country you live in. In some countries, one of the main benefits of investment funds is that capital gains or the transfer of one fund to another are not taxed, which means that the tax impact is deferred until final redemption of the investment. Dividends paid and capital gains earned from the sale of shares are taxed every year.
Lastly it should be borne in mind that the decision to invest in investment funds does not exclude investing in stocks. Diversification is one of the golden rules of investment. You can invest a portion of your assets in funds and another portion in shares or other variable or fixed income assets, provided that you take into account the risks entailed by each investment based on your investor profile.
I would like to finish this article with three pieces of advice my grandfather gave me when I was a child and which can be applied to personal finances:
- “Success requires constancy”: perseverance, preparation, dedication and patience.
- “Don’t put all your eggs in the same basket”: Diversify. It is best to have several financial objectives with different time horizons.
- “Use your common sense”: imagination exaggerates, reason underestimates and common sense moderates. Take a reasonable amount of risk.
Remember, at MoraBanc we offer a wide range of investment options. Contact your account manager to find out which of them best meet your investment profile or call us on +376 884 884.
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