The ultimate goal for each investor is the same – wealth creation! While the destination is the same, there are different routes that you can take to reach it. You can either invest in mutual funds or you can directly buy equity share or stocks from the open market. Each route has its set of pros and cons. In this article, we will analyse these two options and help you figure out which is the better route based on your requirements.
Direct Equity Investment
Direct Equity Investment is an active approach to investing. In this route, the investor takes the decisions regarding which stocks to invest in, when to buy/exit, etc. While investing in direct equity, brokerage charges are applicable when transacting via an intermediary. Direct equity investments are best done by those who understand the workings of the stock market and have time and capability to monitor and research individual stocks.
This is the passive approach to investing. Mutual Funds pool in money from a large number of investors and invest across multiple stocks/asset categories as per the scheme’s objective. The portfolio is managed by professionals who are equipped with the required knowledge and resources.
Direct Equity vs. Mutual Funds – which route should you take?
To answer this question, you will need to consider the below factors:
1. Market Expertise
Stock investments are not lottery tickets where you can invest in anything and then wait for your luck to work its charm. It requires a great degree of knowledge, analytical skills and experience to choose the right stocks for your needs. There are too many dynamics to be considered. If you have a thorough understanding of the markets (and economic factors impacting it), direct equity investments are ideal for you. On the other hand, if you are a novice, mutual funds should be your go-to channel. If you are not comfortable choosing which mutual funds to invest in, you can take the help of financial advisors as well.
2. Time for research
Studying, tracking and analysing the stock market and related economic factors is a time-intensive activity. If you feel that you can devote adequate time in analysing the markets and monitoring their investments, you should opt for Direct Equity. Else, you can go the mutual fund route. Mutual Funds corpus is managed by professional experts (fund managers) who are skilled and trained in that domain.
The USP of mutual funds is diversification. They offer exposure to a wide range of stocks which form part of the portfolio. Even if you invest a small amount (let’s say Rs. 5,000), your money will be spread across multiple stocks. In the case of direct investments, you can purchase only a limited number of varied stocks. To achieve the same diversification level (as offered by Mutual Funds), you would need to have a higher investible corpus. It also depends on your risk appetite. If you are a conservative investor, mutual funds are a better bet as the risk is distributed.
Equity investments have dual benefits – capital appreciation and ownership rights. If you are someone who wants ownership rights of a company, then you should go for direct investing. You will be eligible to attend shareholders meeting, get voting rights, etc. With mutual funds, you will not get these privileges as the shares are held indirectly.
When you invest via the mutual fund route, you have no say or control in the stock selection. That is at the discretion of the fund manager. So, even if you have good reason to believe that a particular stock is going to fall, you will not be able to take any action. However, if you opt for direct stock investments, you are your own fund manager. You get complete control over the buy or sell decisions. You can exit from single stocks, which is not possible with Mutual Funds.
Some Mutual Funds (ELSS) qualify for deductions under Section 80C of the Income Tax Act. However, no such benefit is available with direct stock investments.
7. Exit Load
In direct equity investments, there is no exit load. However, in case of mutual funds, if you exit the scheme before the holding/ lock-in period, you may need to incur penalty charges in the form of exit load.
8. Charges involved
In mutual fund investments, you mainly incur transaction charges (when you go through an intermediary) and fund management charges (based on expense ratio). SEBI makes the guidelines for these expenses and fund houses need to adhere to the same.
For direct equity investments, there are demat, brokerage as well as transaction charges. Mutual Funds have high trading volumes. This, in turn, brings down the per-transaction cost as compared to an individual investor with lower trade volumes.
There is no best investment channel that will hold good for each and every person. Both routes have their own merits & demerits. The final choice depends on you and your needs/ priorities.
Direct equity investing can be highly rewarding for individuals with in-depth knowledge of the markets and high-risk appetite. However, usually, retail investors do not possess such thorough market understanding. Some may not be able to dedicate so much time to research or monitor the market trend or movements. In such situations, it is advisable to take the mutual fund route and leave the investment decisions to professionals or fund managers. They can suggest the best mutual funds to invest in as per your goals, needs and risk profile.
Financial experts like IndiaNivesh have helped thousands of investors optimise the value of their investments. With more than 11 years of experience in the Indian markets, they are adept at understanding the specific needs of each investor. They offer a wide range of financial services including mutual funds, equities, derivatives, insurance, commodities, PMS, investment banking, corporate advisory, wealth management, etc. With an expert like IndiaNivesh, you are sure to make the best out of your hard-earned money.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.