It is the most common, yet the very difficult choice to make is whether to invest capital in direct equities or equity mutual funds. Nowadays investors are more confused about picking the investment avenue. It is because, in the last twenty years, it was found that investing money in the equities (stock market) can help in generating inflation-adjusted returns in the long-term. Giving better returns than other investment options like FDs & Gold piqued the interest of many retail investors. However, there are two ways of investing in equities. One is investing in direct equities which will allow you to bull and sell them yourself and two is investing equity mutual funds. However, the final goal is the same – To get superior inflation-adjusted returns.
However, the two methods are entirely different from each other. From a taxation point of view, direct equity and equity mutual fund have the same structure. Literally! No difference at all. So, one should invest in direct equities or equity mutual funds? Direct equity and equity mutual fund are among the top 10 investment options in India.
Although, one should never compare equity mutual fund with one stock we’ve come across many investors who want clarification on whether go for direct equity or equity mutual fund.
So, let’s find out how direct equity is different from equity mutual fund. Also, where to invest the money – direct equity or mutual fund?
The best way to make the investment choice by discussing different aspects of direct equity and equity mutual funds simultaneously.
Stocks are quite popular for their high-volatility as compared to equity mutual funds. You don’t even need to believe our words instead you can check the old track records to compare the top equity holdings and equity mutual funds on a portfolio. The only thing you will notice that the direct equities have wild volatility; however, the volatility in equity mutual funds is very much less. Also, investing in equity is not just about buying shares based on someone else’s suggestion or investment tip. When you invest in equity you need to conduct analysis on your end as well. Plus, you need to timely monitor the portfolio and apply risk management techniques time-to-time. There is the issue of the skills-set as well. Basic financial knowledge is not enough to invest in the stock market. Because when the time of investment you need to know more than just stocks and should know how to perform industry sectoral analysis.
So, it is difficult for individuals to achieve success. We’re not saying that individuals can’t do this. It’s just the odds are against any investor being able to do so.
On the other hand, when one invests in mutual funds, one buys a portfolio of stocks instead of a single stock. So, when there is fluctuation in prices, each stock have their own price movements which sometimes cancel each other out.
So, one can’t judge a single stock with a portfolio. It has to be a complete portfolio v/s portfolio. It is more like comparing apples with oranges.
Change in Valuations
At some point, the volatility in the stock price valuations triggered by the major announcements, performances, and events. Many major and minor economic events affect the stock market. So, if the stock prices take a hit while investing in direct equities, it could lead to the loss of entire capital.
On the other hand, investors who are invested in equity mutual funds do not need to take care of anything as that is the responsibility of the fund manager. Hence, investing in direct equities require you to do investment based on valuations and in order to do that you will have to do the regular monitoring of stock, company, and keep a close eye on the economic calendar to see through the developments in the economy and major economic events. But, with equity mutual funds, you don’t have to look for the valuations.
The key to successful equity investment is active portfolio management. However, in the case of equity mutual funds, there are skilled professionals and fund managers who take full responsibility for fund management. So, these skilled professionals have to be an expert on managing funds which require expertise in continuously monitoring the Indian and global markets, companies performance etc. to take smart informed decision related to buying and selling equities.
Even investing in equity mutual fund can be dangerous if your fund manager is not proficient in buying and selling of stock. Plus, in equity mutual funds there is a lack of ownership. Investors who prefer to buy stock of the company by directly investing in it will be disappointed to have a portfolio of multiple stocks with no ownership rights. Plus, one will have to pay for ongoing management of the stock fund.
On the other hand, in direct equities, you will only be paying to buy the stock and do not need to pay any single amount until you sell the stock. However, instead of the fund manager, you will be responsible for buying and selling of stock. So, one has to be proficient in monitoring past performances, and need a significant amount of time to manage stock.
So, whatever you choose, choose wisely!
Transaction Costs & Available Resources
As we discussed the active portfolio management is the key to successful equity investment. But, it requires the buy/sell transactions. As a direct equity investor, you will require large capital since the average transaction cost will be much higher compared to equity mutual funds. Although there is a charge of 2-2.5% annually as an expense ratio in equity mutual funds, as their fees for managing the funds.
But, an individual who is invested in direct equity needs to be very selective when making decisions.
To best illustrate this let’s take two scenarios.
Scenario 1: Direct Equity
Consider an investor who has bought shares of ABC Company at Rs. 100 with the funds available. After sometimes, the share price goes down to Rs. 60 and he wants to buy more of the same stock, but unfortunately, he won’t be able to do that due to insufficient resources or to not disturb the overall portfolio.
But, in the case of mutual funds, there is a much larger collection of funds available as it is a pool of funds where investors are investing and de-investing on of regular basis. Let’s take another example.
Scenario 2: Equity Mutual Fund
Let’s assume Mr. X & Mr. Y both have invested in a fund with the stock price of Rs. 100 and Rs. 70 respectively. In total, the fund’s average cost becomes Rs. 85. As we can see, both X & Y are benefited as the cost comes down from Rs. 100 to Rs. 85 for Mr. X and Mr. Y has a profit of Rs. 15.
Conclusion – Where Should You Invest?
By reviewing all areas, one thing we all can agree on is, “Both investment options are quite great”. Both investing models have their advantages and disadvantages. So, before you invest in any one of this option, you should consider risk tolerance, time for research, and market expertise. Our advice is, if you are looking to invest in a handful of stocks that you fully understand and can timely monitor for price fluctuation then you should go for direct equity if you are planning to invest in multiple stocks with minimum risk then you should go for equity mutual funds.
In most cases, the investment is for greater financial plans which help in the move towards the long-term goals. The point is, if your plan is to achieve your long-term financial goals then equity mutual funds can work better for you. But, if you have risk tolerance and plan to get inflation-adjusted returns then you can also go for direct equity investment and let, the experts handle this.
Even many expert investors who are invested in the stock market opt for financial advisory where best stock market experts handle their investment and give proper guidance regarding their investments.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.