Direct Stocks vs Mutual Fund : Which is Better Investment
Would you invest directly in stocks of companies or rather buy mutual funds? Which option is more befitting to you? A lot of investors feel that they should invest directly in shares, because that’s what mutual fund do at the end of the day, however stock investing is a very different game altogether and the dynamics are very different there. So, this article delight comes to your rescue and help you understand Direct Stocks vs Mutual Fund : Which is Better Investment.
Difference between Investment in Mutual Funds and Direct Investment in Stocks
Lets first understand the difference between Investment in Mutual Funds and Direct Investment in Stocks.
Mutual funds are managed by a fund manager in an AMC. This external management of portfolio ensures that there is direct involvement on the part of the investor except at the time of choosing the fund. Direct investment in shares, on the other hand, is done by an individual. It is a hands-on activity involving quick market decisions and is better for experienced stock traders.
In mutual funds, you need to pay fund management charges, a front-end load upon initial purchase, back-end load upon sale, early redemption charges, etc. In direct investment in shares you need to pay brokerage to the stock broker.
Mutual funds being a portfolio of stocks of companies pre-determined and altered by a fund manager, you as an investor have no control over the actual choice or trade of stocks. You also cannot choose to exit from 1 or 2 of the stocks from the portfolio. While in direct stocks, you can enter, exit or switch to various stocks anytime.
You can invest in mutual funds through a fixed monthly Systematic Investment Plan (SIP), as it is managed by a professional. You cannot make such a fixed investment in shares directly as the prices fluctuate constantly, so it needs much personal attention.
Direct Stocks vs Mutual Fund : Which is Better Investment
We will try to explore the answer based on various perspectives :
Charges & Cost : Direct Stocks vs Mutual Fund
When you buy stocks directly, you only have to incur the demat account charges along with STT and transaction charges if any. However when you invest in mutual funds, you have to pay something called as Expense Ratio. The expense ratio includes numerous charges for running the mutual fund plan. They recover this cost from the mutual fund investors on a day-to-day basis. As per SEBI regulations, the total expense ratio (TER) allowed is 2.5% for the first Rs.100 crore of average weekly total net assets. So sometimes, the higher expense ratio can overshadow the decent returns. So this is one point where direct stocks are better than mutual funds, but only if you are able to generate the same returns like mutual funds yourself.
For SEBI guidelines on TER, refer https://www.amfiindia.com/investor-corner/Expense-Ratio.html
Active vs. Passive Involvement : Direct Stocks vs Mutual Fund
You have to be quite active in direct stock investing. The passive nature of mutual funds makes it easier for anyone and everyone with money to take part in it. Do you have sufficient time to look after your investment portfolio? If your answer is ‘no’ ,you might want to stay away from direct investments in the stock market and prefer top-rated mutual funds to invest your money in. As for direct investment, you need more time and dedication.
Volatility & Return : Direct Stocks vs Mutual Fund
Because mutual funds hold a diversified portfolio, negative returns are cushioned by the other stocks that do well. For example, if your portfolio contains 50 stocks, of which 5 are dropping, even the slightest growth in the other 45 will prevent your overall fund value from coming down. Direct investment in stocks does not offer you this protection and makes your stocks volatile. If there is very huge return, investors sell their stocks and want to lock in the profits and in the same way if there is a steep loss, they want to sell it off and get out of the “risky” game. This is exactly the reason why you will find investors who have a mutual fund for last 7 yrs, but very rarely you will find an investor holding the same stock for 7 yrs.
80C Benefits : Direct Stocks vs Mutual Fund
Direct stock investing has no 80C tax benefits, however if you invest in ELSS (tax saving mutual funds), you can avail the taxation benefits. Might be the one small reason why you can prefer mutual funds over direct stocks
Knowledge Required : Direct Stocks vs Mutual Fund
If you are new to investments and do not have much idea about risks and returns, mutual funds can prove to be a better option than direct investments in the stock market. Highly skilled fund managers manages mutual fund corpuses who can make better investment decisions during a volatile market. Direct stock investments can be highly risky in such regards. There are investors who have spent their life time in studying how to do stock investing and still they make big mistakes.
Conclusion
Direct Stocks vs Mutual Fund : Which is Better Investment
So coming to the point, stock investing is not a child’s play. It takes years of hard work and a lot of knowledge to pick the correct stocks, where as you do not need much knowledge when it comes to mutual funds investing. For those investors, who want to play little safe with their wealth creation, should choose equity mutual funds rather than trying to burn their fingers in direct equities. Mutual fund investments usually suit all kinds of investors, even those with a low-risk appetite. Direct stock investments are meant for those who understand it well and are ready to take the required risks.
Final Takeaway
Mutual funds have a longer-term growth trajectory and will give good returns only after 5-7 years, while shares could give you quick returns if you buy and sell at the right time. If you are looking to invest in different types of asset classes like equity, debt, and gold, mutual funds could be the best option for you. Direct stock investments give you exposure only to one asset class. Thus, you may miss the diversification benefit available under the mutual fund platform. Whether you must invest in mutual funds or shares depends on your knowledge and experience of the market and the amount of time you have. If you can do apt stock investing on your own, it does not make any sense to invest via mutual funds.
Read also : Which is better Flexicap or Multicap Mutual Fund ( https://thebrightdelights.com/which-is-better-flexicap-or-multicap-mutual-fund/ )