Comparative Analysis : Equity Mutual Funds & Stocks

introduction

One of the most important and difficult task as a new investor is to make choice between Equity Mutual Funds vs Individual Stocks. Whether we should invest in equity funds or individual stocks?

Everyone knows there are two distinct ways of investing in equity. One is to choose individual stocks and buy and sell them yourself. The other is to invest through equity mutual funds. The final goal is the same: to benefit from the superior returns that equity investing offers. Choosing between the two kinds of investments depends on a person’s risk taking ability, and returns expectations. It also depends on how much time you have to research your investments, what type of fees and expenses you are willing to withstand.

Equity Mutual Funds vs Individual Stocks : Which is Better?

When you buy a stock, you are owning a share of the corporation. You make money in two ways- Appreciation in Share Price and Dividends offered by those stocks. While, Mutual Fund is an investment led by professional managers who invest a pool of money collected from various investors in diversified securities.

Let us discuss the comparative analysis of investments in equity mutual funds and in individual stocks.

Risk

• Stocks are riskier than mutual funds. Individual Stocks are vulnerable to the market conditions and volatility. The performance of one stock can’t compensate for the other.
• A major advantage of investing in equity through equity mutual funds is disciplined diversification. The risk gets reduced by diversifying a portfolio by investing in a large number of stocks.

Professional Fund Management

• Picking individual stocks means it is your responsibility to build a portfolio. You’ll need to do a lot of research to build your own diversified portfolio. You’ll need to pick companies with different sizes, strategies, and industries, explore the annual reports. You should be keep yourself up to date with what is happening at each of the companies in which you maintain an investment.
• With an investment in equity mutual funds, you have the benefit of a fund manager who has extensive expertise and experience in the field. Whether it is picking the stocks or monitoring them and making allocations, you do not have to worry about any of it.

Affordability

• Generally, to have a well balanced portfolio, you would need to have about 25-30 stocks in your portfolio. This can lead to a good mix of performance and stability. Such an approach can be achieved if you have a large enough corpus. As an individual, you may not have enough funds to create a adequately diversified portfolio of stocks. Thus, Stocks is an expensive investment.
• On the other hand, Equity Mutual funds provide instant diversification. You receive diversification benefit without investing a huge corpus when you buy units of the mutual funds that are spread across several stocks. One can have a diversified portfolio by investing in small and flexible chunks (beginning with an amount as low as Rs. 100). So, it is comparatively an affordable investment.

DEMAT Account

With stocks, you have to open a DEMAT and a share trading account.
It is very convenient to invest in mutual funds, no need of DEMAT account. Everything gets done for you for a very small management fee. Online platforms make it even easier to invest in mutual funds. They do fund selection, annual portfolio review, automated investments and more, completely online.

cost of investing

• Brokers charge you when you buy or sell the stock. Those fees can vary depending on the services you receive. If you select your own stocks, you will pay less. If you want advice so you can outperform the market, you will need a full-service broker, incurring an additional costs.
• Equity Mutual funds charge annual management fees. You need to pay fund management charges, a front-end load upon initial purchase, back-end load upon sale, early redemption charges, etc. No-load funds charge no fees. Due to the economies of scale, a very small management fee is charged.

Control on picking and holding of stocks

• An investor has more control over the stocks while picking, holding and selling them in his/her portfolio. Most investors intend to buy low and then sell high. They invest in fast-growing companies that appreciate in value. That’s attractive to both day traders and buy-and-hold investors. Day traders group hopes to take advantage of short-term trends, while the buy-and-hold investors expect to see the company’s earnings and stock price grow over time. They both believe their stock-picking skills allow them to outperform the market. 
• In the case of mutual funds, the decision pertaining to the choice of stocks and their trading is solely in the hands of the funds manager. You do not have control over which stock is to be picked and for what duration. As an investor, if you invest in mutual funds you do not have the option to exit from some stocks that are in your portfolio. The decisions pertaining to the fate of the stocks rest in the hands of the fund manager. we should check the mutual fund annual report each year. It is to ensure the management company is sticking to the financial philosophy in which we believe that we are comfortable with the holdings.

summary

1. Both Mutual fund and share market can fetch you profit but it matters how much of time and effort you are able to put on it.
2. Above all, the capability of taking risks also plays a vital role in earning a profit.  Taken together, this is a persuasive list of reasons to choose mutual funds over equity.
3. The recent years have seen a lot of investors move from direct stocks. An increasing percentage of the average Indian population is turning towards mutual funds.