Investing in mutual funds vs stocks
Equity as an asset class is the best vehicle to create wealth in long term. There are two major ways in which one can invest in stocks. One is directly in stock market and the other one is through mutual funds. In this blog we will discuss the advantages of investing in equities through mutual funds as compared to direct investing.
Equities by nature are very risky. Mutual funds consist of many different stocks (typically 30-70), hence your risk is spread enough to ensure better risk-adjusted returns. Here based on the investment objective and regulatory compliance frameworks fund manager manages the portfolio because of which the probability of risk-adjusted return is high compared to stocks.
In Stocks, an investor is restricted to buy only one asset class i.e. equity. However in mutual funds it’s not the case, during a bear market the fund manager may shift to less risky instruments like debt or less risky equities. This freedom of selecting multiple asset classes enables better risk adjusted returns in.
The volatility of individual stocks are very high, a stock may climb 10% in a day or fall 15% in a day, but this is not the case with mutual funds because the influence of unusual movements in individual shares will be balanced by rest of the portfolio thereby reducing the volatility. For an example, let’s assume due to any unfavourable news the stock of company X takes a dive and loses around 60% within a month. This would have given a heavy loss to an investor who had invested in shares of X. Whereas, if an investor holds a diversified equity fund where stock of X is 5% of the portfolio then the overall loss for the investor who invested in the mutual fund would be 5% instead of 60%.
Stock selection & Monitoring
Selecting a stock to invest in requires lots of research and consumes a lot of time. To create a diversified portfolio at least 10-20 stocks are required. Not everyone has that kind of expertise or time to do the requisite research.
Mutual funds are managed by knowledgeable fund managers who pick stocks after analyzing various fundamentals aspects of the stock, growth perspective of the company, macroeconomic situations etc.
After selecting the stocks, continuous monitoring is also required to keep track of the performance of the stock. However, in case of mutual funds since the stocks are selected after thorough research, a review once a year would be sufficient.
When we buy individual stocks through a stockbroker, the brokerage ranges between 0.5% and 1% on both buying and selling sides. Also, there are account maintenance charges, DP holding charges that are collected by broker/depository. In case of mutual funds they carry out these buy and sell transactions in bulk due to which the charges associated are less and are deducted from the NAV of the fund as expense ratio.
In case of stocks, if you want to sell few stocks in your portfolio within a year for which you got profit you are liable to pay LTCG at 15%. In mutual funds, if the fund manager sells few stocks from the mutual fund portfolio within a year then there is no tax is applicable. However if you sell an equity mutual fund within a year for profit you will be liable to pay 15% STCG on profits.Investing in stocks vs Investing in Mutual funds Click To Tweet
Don’t confuse yourself anymore; invest confidently in direct mutual funds in a single click through our WealthTrust app today we bet you will appreciate yourself one day for taking this wise decision.