If you are the new investor the most important and difficult choice you will face as a new investor is whether you should invest in equity funds or invest in individual stocks. There is no secret of the fact that an average investor has to pick their own stock to be successful. Investing in equity means purchasing shares of a portfolio overseen by a professional portfolio manager. The portfolio manager is responsible for picking the stocks in the portfolio as well as the buy, sell and hold decisions. After you've chosen a good equity fund it’s your responsibility is to keep on buying a good equity fund, your responsibility is to continue buying shares, reinvesting your dividends and capital gains, and keep checking the mutual fund annual report each year to ensure the management company is sticking to the financial philosophy in which you believe whether you are comfortable with the holdings.
Here are few ways to tell you if you should invest in the equity fund or just pick your own individual common stocks.
Do you have the ability to Read and Understand Financial Statements- Can you read GAAP financial statements along with income statement and balance sheet?
If you have that skill and capabilities to select your own individual stocks this shouldn't be any more difficult than study a division or private business opportunity such as investing in a limited liability company. In such a scenario it seems little silly to look for a professional money manager to sit around and research business for you all day unless you rather keep eye on your primary occupation.
Do you enjoy the process of studying, understanding and analyzing companies- If you love to study business and to understand the world and what people truly value than don't visit to professional but if you don't care about these things and don't know a bit about it then don't waste your time trying to find individual companies rather than pay a professional their management fee and acquire good, well diversified equity fund.
Do you mind the Complexity of Managing Multiple Investment Positions or would you rather hold a Handful of Equity Funds?
Even a focused investment portfolio will likely contain 10 to 20 stocks. A widely diversified portfolio may have 30 to 100 stocks. Do you want to keep track of all securities? The dividends dates and income? The cost basis for each position? If you want to build your entire investment portfolio history on a single, short spreadsheet, equity funds are probably the better selection.
Do you have an Obsessive Need to check Your Stock Prices Every Five Minutes?
If you can't think like a long-term investor, you might want to build a layer of protection and choose equity funds over individual stocks. Unless you go to the ETF route (exchange traded fund) mutual funds only adjust their stock price or NAV, once per day, after hours. This makes your work less and you don't need to be glued to a screen on panicking over a 50% move in blue chip stock that shouldn't cause you any disturbance.