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  • Writer's pictureArvind Dang

Five methods of investing in equity

Updated: Dec 8, 2023





Investing wisely is a crucial step toward achieving investor’s financial goals. With different options available, it's essential to understand the merits and demerits of each. This article explores five popular investment methods in the Indian context:


· Direct Investment

· Mutual Funds

· Derivatives

· Index Funds

· ETFs (Exchange Traded Funds)





For each method, the merits and demerits w. r. t. following aspects are covered.

· Controls

· Costs

· Risks

· Liquidity

· Transparency

· Returns

· Dividends

· Diversifications

· Illustrations

· Ethical

· Statutory perspectives

· Reporting requirements

· Taxation-Short short-term capital gain and long-term capital gain


Brief description of each method in my book available as under.

For more details,readers can buy my book from Amazon, as per the underlined links given below.

India: As a paperback, as a Kindle

Global: As a paperback, as a Kindle


Method 1

1a) Direct equity:

Here, investors can directly invest in stocks listed on the Bombay Stock

Exchange (BSE) and the National Stock Exchange (NSE), India's two major

Stock exchanges.


1b)Stocks can be invested directly in Indian stocks through brokerage firms like;

· Zerodha

· ICICI Direct

· HDFC Securities

· Sharekhan

And so on


Merits and Demerits of Method 1- Directs Equity Investment


i)Control: The investor has complete control over the stocks to be invested.


ii)Costs: Potential transaction costs include brokerage fees and taxes.


iii)Returns: There is potential for high returns based on the choice of the investor.


iv)Dividends: The investor directly receives dividends as declared by the company.


v)Risk management: Investors can react quickly to market conditions.


vi)Transparency: Being direct, the investor has full transparency of stock holding and performance information.


vii)Liquidity: It is governed by the type of stock and market conditions.


viii)Diversification: Limited and driven by the fund's availability with investors.


ix)Ethical Aspects: Limited control over responsible investing.


x)Statutory perspectives: Investors must Comply with regulations set by the Securities and Exchange Board of India (SEBI


xi)Reporting requirements: Investor must Maintain records of transactions and report capital gains on income tax returns as per applicable tax slab.


xii)Taxation: Short term Capital gain-(STCG) is currently 15% for AY 2024-25

: Long-term Capital gain (LTCG) is currently 10 % for AY 2024-25 if

gains exceed > Rs 1Lac for stocks held more than one year.

Rates may change at the discretion of the Government of India.


Method 2


2a)Mutual Funds:

Mutual fund refers to a corpus of funds of different investors, managed by investment professionals known as fund managers or portfolio managers.

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Some popular indices tracked by mutual funds in India are Nifty 50 (NSE), Sensex (BSE), and various sector-specific indices.

2b) Popular MF Investment platforms in India include;

  • Kuvera

  • Groww

  • Zerodha Coin

  • Paytm Money

  • Edelweiss Mutual Fund

  • Axis Direct

  • Aditya Birla Money

And so on

Merits and Demerits of Method 2- Mutual Funds:


i)Control: Limited as these are managed by professional fund managers.


ii)Costs: Transactional costs payable to fund managers are involved.


iii)Returns: Higher returns potential as investments are analyzed and managed by professional teams.


iv)Dividends: yes, dividends can be received from the MF manager.


v)Risk management: Ensures diversification of portfolios & risk management.


vi)Transparency: MFs offer regular reporting of holdings & performance information.


vii)Liquidity: Mutual funds are easily traded on exchanges, and open-end funds are redeemable daily.


viii)Diversification: Mutual funds provide broad diversification across various assets.


ix)Ethical Aspects: Few mutual funds offer ethical investing options aligned with values.


x)Statutory perspectives: MF are regulated by SEBI & investors can read offer documents.


xi)Reporting requirements: Investors in mutual funds must report capital gains from their fund investments on their annual income tax returns.


xii)Taxation: STCG: currently @15% for AY 2024-25

: LTCG: currently taxed @10% for AY 2024-25 if

gains exceed > Rs 1Lac for stocks held more than one year.


Method 3

3a) Derivatives:

An equity derivative is a financial instrument whose value is based on equity movements of the underlying asset.


Derivatives offer the potential for high returns but also come with complex strategies, high risk, and may need to be more suitable for inexperienced investors. They can be used for hedging, speculation, or leverage.


3b) Platform:

Derivatives trading, including futures and options, occurs on BSE and NSE. These exchanges offer a wide range of derivative products.

Indices like Nifty. Bank Nifty (NSE) and the S&P BSE Sensex (BSE) are commonly used as underlying assets for derivative contracts.

3c) Options

  • Give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a selected date (expiration date).

  • It can be used to speculate on the future price of an asset or to hedge against risk.

  • It is less risky than futures because the buyer is not obligated to exercise the contract.

3d) Futures

  • Obligate the buyer to buy and the seller to sell an underlying asset at a specified price on a selected date.

  • It can be used to speculate on the future price of an asset or to hedge against risk.

  • It is more risky than options because the buyer is obligated to exercise the contract, even if the underlying asset's price moves against them.


3e)There are two choices or bets available for the investor.

Choice 1 PUT = which is a bet that stock will fall vis a vis a strike price

Choice 2 CALL= which is a bet that the stock will rise vis a vis a strike price


So, in Option, the investor can decide whether to exercise their sell or buy stocks in PUT or CALL option, depending on their risk perception on the likely profit or loss computation.


Merits and Demerits of Method 3- Derivatives:


i)Control: offer limited control due to their complex strategies and risks.


ii)Costs: Involve transaction costs and margin requirements.


iii)Returns: Potential for high returns with leverage but also possible high losses


iv)Dividends: Derivatives typically do not pay dividends


v)Risk management: Derivatives allow for hedging and speculation with high-risk trading.


vi)Transparency: Inadequate transparency in complex derivative products


vii)Liquidity: High liquidity with potential for quick entry and exit.


viii)Diversification: Derivatives provide portfolio exposure without owning underlying assets.


ix)Ethical Aspects: Speculative nature and potential for high-risk trading


x)Statutory perspectives: Regulated by SEBI and exchanges like BSE,NSE.


xi)Reporting requirements: Investors in derivatives must report their profits and losses from trading activities on their income tax returns.


xii)Taxation: Profits and losses from derivative trading are treated as speculative income and taxed according to tax rates.

Method 4

4. Index funds:

Index funds in India typically track popular indices such as the Nifty 50 (NSE), Sensex (BSE), and other sectoral indices listed on the BSE and NSE. These are typically purchased through stock exchanges such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE)

4a)In India, several Asset management companies” offer index funds such as below:

  • HDFC Mutual Fund

  • ICICI Prudential mutual fund

  • UTI Mutual fund

  • Reliance mutual fund

  • SBI mutual fund

  • And so on

4b) Below are names of a few popular “Index funds” in India that are

historically known for their strong performance.

  • ICIC Prudential Nifty Next 50 Index fund

  • UTI Nifty Index fund

  • SBI Nifty Index fund

  • HDFC Index fund

  • Mirae Asset Large Cap Fund

  • And so on

Merits and Demerits of Method 4- Index funds:


i)Control: Index funds offer limited control with a passive strategy that tracks an index.


ii)Costs: Lower expense ratios compared to actively managed funds.


iii)Returns: Potential to match index returns without active management.


iv)Dividends: Potential for dividends from underlying index components


v)Risk management: Risk is spread across multiple securities in an index,


vi)Transparency: Holdings are disclosed daily with clear tracking of index performance.


vii)Liquidity: Easily tradable like stocks, providing access to broad markets.


viii)Diversification: Available broad diversification by mirroring an index.


ix)Ethical Aspects: Index funds often follow ethical or responsible investing principles.


x)Statutory perspectives: Index funds are regulated by SEBI & investors can read offer documents.

xi)Reporting requirements: Investors must report capital gains from their index fund investments on their income tax returns.


xii)Taxation: STCG: currently @15% for AY 2024-25

: LTCG: currently taxed @10% for AY 2024-25 if

gains exceed > Rs 1Lac for stocks held more than one year.


Method 5

5. ETFs (Exchange Traded Funds)

5a) ETFs are listed and traded on stock exchanges like BSE and NSE. Investors can buy and sell ETF units during trading hours. ETFs often track benchmark indices like the Nifty 50, Sensex, and sector-specific indices


5b) The Nifty 50 index reflects the performance of India's top 50 large-cap stocks. A few top ETF examples are below.

Similarly, BSE Sensex 30 represents 30 of the largest and most actively traded stocks on the Bombay Stock Exchange.

5c) A few examples of ETFs are ;

· Nippon India ETF nifty 50

· SBI ETF Nifty 50

· UTI Nifty Next 50 Index

· IDBI Gold ETF (which monitors Physical Gold prices)

· Kotak Banking ETF(tracks Nifty bank index)

And so on


Merits and Demerits of Method 5- ETFs (Exchange Traded Funds)


i)Control: ETFs offer full control with individual choices.


ii)Costs: Lower expense ratios compared to actively managed funds.


iii)Returns: Potential to match the performance of the index.


iv)Dividends: Potential for dividends from underlying assets.

v)Risk management: Manage risk through stop and limit orders.


vi)Transparency: Holdings are disclosed daily with clear tracking of index performance.


vii)Liquidity: liquidity like stocks, real-time pricing, and trading.


viii)Diversification: Enjoy broad diversification across an index or sector.


ix)Ethical Aspects: ETFs often follow ethical or responsible investing principles .


x)Statutory perspectives: ETFs are regulated by SEBI and listed on stock exchanges like BSE and NSE


xi)Reporting requirements: Investors need to report capital gains from ETF investments on their income tax returns.


xii)Taxation: Taxation of gains from ETFs follows the same rules as mutual funds and index funds, depending on the underlying assets.

Names of International level players for equity investment.


Popular players and their offerings are listed below.


  • Fidelity Investment: It is an American brokerage. It manages a large family of mutual funds, provides fund distribution and investment advice, retirement services, index funds, wealth management, securities execution and clearance, asset custody, and life insurance

  • Charles Schwab: It is also a USA-based financial firm. It offers retail and commercial banking, wealth management, investment, and advisory services. Retirement, and checking and savings accounts.


  • Vanguard: It is one of the world's most respected investment management companies, offering a broad selection of investments like Mutual funds, ETFs, retirement services, and insights to individual investors, institutions, and financial professionals.

And so on


You can also refer to chapter 5, “Investment of Surplus Funds,” in my book “Profitability and Ethics Key Ingredients for Business Success.


Way Forward


As evident from above, each investment method has advantages and disadvantages.

The right choice for an investor depends on the Investor’s financial goals, risk tolerance, and investment preferences.

Investors may consider diversifying portfolios across these methods to balance risk and potentially enhance returns.

Considering the complex landscape of equity investments, it is prudent to follow statutory requirements, conduct equity research, and take expert opinions from taxation and financial advisors.



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