What's better? Investing in Equity MFs or directly in stocks?

  • Posted By : reliancesmartmoney.com
  • Tuesday Jul 03, 2018

A quick comparison:

Equity MF

Direct Equity

Entitles investors to use a Fund Manager’s expertise

Investor has to individually create and manage his portfolio

Owning to a dedicated financial mentor, the risk appetite is lower

Since it is more emotionally driven, involves higher risk levels

Better chances of inflation-adjusted capital gains

Requires thorough knowledge of market movements to beat effects of inflation/economic movements and gain returns

Cost-effective diversification

Larger capital required for achieving diversification

Did you know that 22% of market capitalization is contained by individual holdings and a mere 4.5% is with Equity Mutual Funds? Recently, due to improved directive and governance, equity investments with mutual funds are gaining an investor’s trust effectively. If you have to choose from among these two investment categories, you may find it challenging and will need to understand a few essential pre-requisites.

Before we delve deeper, let’s understand what Equity Mutual Funds are:

Equity Mutual Funds are investment-centric financial instruments that function on the principle of buying and holding stocks for a long-term wealth accumulation. These are actively managed funds, wherein the Fund Manager strategically bases decisions on stock’s fundamental aspects (alterations on a macro-level within the company like organizational forecasts, turnover ratio, performance, etc.) and are designed in a way to nurse investor preferences efficiently.

Direct investments on the other hand mean an individual makes investments directly into stocks on a personal level based on his knowledge of the share market.

Equity Mutual Fund Features:

1. Secure Portfolio Management

Care should be taken in selecting a security, corpus allocation, tracking performance and booking profits / reinvestment.
The investor’s portfolio should be free from junk and only prominent stocks that are potentially profitable are invested in. 

2. Brokerage Costs and KYC Account

No demat account but a KYC registration is needed for investments in mutual funds and they pay only a fraction of the brokerage cost (that investors have to bear).

3. Diversification Benefit

When investing in Multi-cap Equity, an investor can easily avail diversification at a lower corpus as compared to the capital needed to create a diversified portfolio when investing directly in stocks. Ideal diversification is achieved with investing in at least 25-30 shares across sectors and caps.

4. Management Costs

Investments incur an entry load (costs payable upon initiation), exit load (of 2%) and redemption fees if withdrawn before the minimum holding period or within a year.

5. Direct Equity Investment Features

While Mutual Funds are more suitable for cautious investors who like to move safely with their investments, if you are more of a strategist, risk-taking savvy investor who has sufficient knowledge and understanding of market movements, direct investments in stocks could be your cup of tea.

6. Buy-and-Sell Flexibility

Since this is individually managed, one can quit from an investment of a particular stock that has been performing deficiently and invest in another promising index, easily. You are free to invest in stocks based on your preference. Investors can buy and sell individual stocks as well.

7. Immediate Reinvesting

It is convenient to book profits and reinvest capital gains or dividends with no procedural and time bounding.

8. Active Involvement

You become a shareholder and in this way play an active part of the company with the sovereignty to attend their annual meetings.

9. Demat Account and Brokerage

When investing directly in stocks, one needs to create a demat account which is associated with Demat charges and also pay a one-time brokerage fee (0.5 to 1%). in Direct Equity, there is no exit load.

A smart way investing is to include both Equity Mutual Funds and Direct Stocks in your profile.

  • Directly invest some portion in prominent Large-Cap stocks if you have a good understanding of market movements.

  • Invest remaining capital in Equity Mutual Funds and focus on Mid and Small Cap funds. These stocks have higher growth potential but are also associated with high risk levels.

  • Within this corpus, build a portfolio that includes Multi-cap investments, thus, gaining maximum benefit from diversification of mutual funds.

Direct Equity

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