Equity Mutual funds invest in stocks of publicly listed companies. You as an investor also have an option to buy these stocks directly from the stock market.
Both have their advantages and downsides, here is what you should know about investing in both avenues. And how you can make your selection.
Understanding the Gist of Mutual Funds
Mutual fund (MF) scheme, issued by mutual fund houses, pools money from various individuals who wish to save or invest. The fund houses then invest the money collected across various financial instruments to generate high returns. The MFs are professionally managed.
So basically, you as an investor own units that represent the portion of the fund you hold. The investor is also known as a unitholder. The increase in the value of the investments along with other incomes earned from it is then distributed to the unitholders in proportion to the number of units owned. This is given after deducting applicable expenses.
Knowing Direct Equity
Direct equity investment can be very rewarding, however, the risk of loss in direct equity is also very high. It is not easy to understand equity. One needs to understand the underlying business and industry the business operates in, before investing in equity (stocks).
This means, you as an investor have to go through the company’s past records, financial performance, management experience, and even external factors such as Government policy, foreign exchange rate, and political changes both domestically and internationally.
If you can balance find the right balance between risk and return, you can reap greater benefits.
Direct Equity vs Mutual Funds
There are various benefits of investing through mutual funds which may not be available if one invests directly through shares.
While direct equity investing provides high returns, it is feasible for those investors who can understand the working of equity markets regularly.
So for those who don’t have the time or skill to monitor equity or share markets, the mutual fund’s route could be better and beneficial.
Some of the advantages of mutual funds are as follows:
Professional Management
Individuals may not have the necessary skills to identify the right stocks. Not everyone can dedicate time to do research. Mutual funds, therefore, offer investors the expertise of fund managers.
Low Ticket Size
As some shares quote very high prices, they remain inaccessible for small investors. However, one can start investing in mutual funds which invest in various stocks as low as Rs. 500.
Fees & Expenses
For their services, mutual funds charge fund management fees and expenses which are capped under the regulation.
If an investor wants to trade in equities he/she need not pay for the DEMAT or trading charges. However, investors should be careful not to buy funds with very high expense ratios.
Liquidity
Open-ended funds allow investors to exit at the prevailing NAV, subject to exit loads. This helps in financial planning. When an individual invests in shares, he is not sure if he can sell the shares in the market at a fair value or not.
Risk Management
An individual may go overboard on a particular stock. However, a fund manager will have risk management guidelines in place.
There are limits on how much a fund manager can invest in each stock & sector. A fund manager’s decision to invest in a particular share is backed by strong research conducted by the fund manager & his/her team members.
Choice Of Funds
Investors can choose to invest in a scheme that suits their investment needs. For example, an aggressive investor may choose to invest in a diversified equity fund, whereas a less risky investor may opt for a balanced fund.
Taxation
When an individual investor buys & sells shares before completing the tenure of 1 year, he ends up paying short-term capital gains. However, the fund managers may keep transacting in shares at varying intervals.
