After investors take the decision to park their money in a particular sector, they are in the position of choosing between direct investing or an index exchange-traded fund (ETF). While direct investing gives investors greater flexibility to invest in companies they believe in and know, it involves a high risk but is a high-reward investment option.

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Index ETFs, on the other hand, are the investments that seek to replicate and track a benchmark index like the S&P 500 as closely as possible.

In order to choose between both the investments, it’s important for individuals to access their risk-taking capacity and the returns expected.

Also read | Mutual funds vs direct equity: Which investment option should you prefer in 2021?

According to Chintan Haria, Head- Product Development & Strategy, ICICI Prudential AMC, the stock market tends to be volatile owing to a variety of factors that affect market sentiments. Staying updated on all those may not be possible for a retail investor.

However, the diversity of an ETF makes it less volatile than an individual stock.

“More importantly, during volatile times, the drawdowns seen in an index fund is likely to be less sharp, unlike direct investing,” Haria explains.

Also read | ETF vs mutual funds: Here's how they compare

Looking into the data of 2020, Prashant Joshi, Co-founder and Partner at Fintrust Advisor, says one can see that decadal low-interest rates and the equity market crash in March made equities extremely attractive drawing an entire array of investors, from retail to portfolio managers to domestic mutual fund houses to FIIs.

For the year 2020, backed by global liquidity, he adds, FIIs infused Rs 65,246.26 crore into the Indian market, making it the only EM to have received net FII inflows in the last 1 year.

"Resultingly, with such euphoria, direct investing too saw a surge with a record 6.8 million new Demat accounts opening in the first 6 months of FY21," Joshi tells.

However, he adds that taking learnings from the past we must say that spectacular rises can have breath-taking falls, and it can catapult any market into oblivion. And it is where the gullible investors are caught unawares losing the most.

So, according to Joshi, while new investors should participate in the market, they should not let emotions and random stock recommendations rule their investing decisions. Rather, to ride the market, they should invest through index ETFs which offer diversification benefits and better risk-adjusted returns eliminating any form of emotional bias and stock-specific risks, which are pitfalls of direct investing.

Disclaimer:

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(Edited by : Ajay Vaishnav)

First Published:Jan 22, 2021 3:52 PM IST