Learn with ETMarkets: Why buy individual stocks when you can choose index funds

Investing in stocks or a basket of stocks, known as index funds, mainly depends on the investor’s motive of investment such as its targeted goal, risk appetite, and expected returns.

In a trending market upwards, investing in stocks or index funds would yield strong returns however in a declining or sideways trend individual choice matters.

An index fund largely means investing in a basket of stocks that represents a particular index. So, giving an example; if an investor chooses to invest in an index fund of Nifty 50, then the amount will get invested amongst all the 50 stocks in Nifty, in the same proportion.

This is also called a passive investment strategy where the investment is diversified amongst various stocks, cost of investment and risk both are low versus an investment done in individual stocks.

In terms of returns, the longer the time frame for investment (say 3-5 years or more) investors can earn healthy returns.

On the flip side, investing in stocks is a risky affair but can earn healthy returns as compared to index funds, if invested in fundamentally sound stocks having healthy financials and strong corporate governance.

Meanwhile, investing in stocks also needs some knowledge and conviction about the sector, company, and future growth prospects of the management.

In addition, many investors prefer investing in known midcap or large-cap stocks as they can generate better alpha as compared to investing in index funds.

So, investing in stocks or index is an individual choice, but overall, it is a belief that investors taking high risks will earn higher returns and that holds true in the case of stocks.

To conclude, stocks are preferred because the experienced investor would time the market and buy stocks at low levels and sell at high points which would help investors in generating better alpha.

Besides, source of information about individual stocks and the process of shifting from one to another are comparatively easier in stocks.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)