Mutual funds vs Stocks – Which is best for you to invest?
Mutual funds vs Stocks which one to choose to invest for your financial goals?
This question you should ask yourself if you are about to start your investments in both mutual funds and stocks or in one of them.
I have seen some investors investing in direct stocks thinking that they can gain more return than mutual funds.
In addition, they think that mutual funds finally invest the money in the stocks only.
Why I can not do my self?
Mutual funds vs Stocks -Which is better for you?…
1) Knowledge required in mutual funds and stocks…
Stock Investment needs a lot of knowledge.
But people think the stock investment is very easy.
In addition, they will invest based on the tips they receive in the news channels.
I have seen people gaining great knowledge and having many years of experience in stock investment doing big mistakes and losing wealth.
When it comes to mutual funds, you do not need a great knowledge to invest.
2) Professional Mutual fund Manager vs You Investing in stocks…
If you are investing in stocks means that you are the manager of your portfolio.
When it comes to mutual funds, there will be a professional fund manager.
In addition, He knows the fundamentals, technicals, credit cycles, economy, business, and Interest rate cycles better than you and me and will be having qualifications related to wealth management.
The fund managers will be deep knowledge about the sector and they will visit the company premises also to understand the company business.
However, many investors feel that they can invest in stocks and can get returns more than the mutual fund’s fund manager which is not real.
In addition, Mutual funds pay huge salaries ( in crores) to the fund managers.
If you are capable of investing better than a fund manager then you can also become a fund manager for mutual funds. ( just joking).
3) Fees and Cost in mutual funds vs stocks…
When you invest in stocks, you have to incur only Demat charges, transaction charges, and Security Transaction charges.
In addition, this expense ratio will be charged to the funds on a daily basis, this ratio will be 0.1 to 2.5% depending upon the scheme category.
As long as the fund manager generates returns and creates value, there is no harm in paying expenses to the mutual funds.
According to me investing in the stock market for the sake of saving some fees is like preparing a dish without salt ( concentrate on the final taste).
However, if you are capable of investing in stocks and generating higher returns than mutual funds, then it’s better to go with stock investment.
4) Stock Investment needs active and Mutual funds need passive participation…
Mutual funds will pool investors’ money, generate returns, charge fees to the investors, pass on the profits to the investor.
In addition, in mutual funds there will be a team of analysts who analyzes the stocks.
So, investors’ involvement in mutual funds is “passive” in nature.
Whereas in stock investment, Investors need to do research on their own, study the companies, should control his/her emotions.
So, Investors’ role in direct stock investment is “Active” in nature.
Finally, Mutual funds are for those who do not have to do stock research and have less knowledge.
In addition, Many Investment advisers like me also do not have the expertise to do stock research.
As a layman you should ask yourself whether you have more expertise than the mutual fund manager.
5) Diversification in direct stock investment vs mutual funds investment…
We all know that India used to lose more games and trophies when Sachin was playing in the Indian Cricket Team.
This is because the Indian cricket team has no or few players like Sachin’s caliber.
But Nowadays, the Indian Cricket Team is winning more matches and trophies under Virat Kohli Captaincy.
In addition, this is happening because, Now, the Indian Team relies on Single Player Performance, and the team has a balanced team in all departments like bowling, fielding, and batting.
Similarly, In the stock market, you should diversify your investment in more stocks in order to diversify the risk.
But most investors fail to invest in 50 quality stocks ( Sachin Like) and end up investing in 3 to 10 stocks only.
So, for direct stock investors profits and losses will be huge.
In addition, if anyone stock gives huge losses, the overall portfolio return for the direct stock investor will be impacted in a big way.
When it comes to mutual funds, the fund manager will invest in 30 to 100 stocks depending on their team research.
So, if anyone stock goes into losses, the other stock’s profit will cancel out that loss.
However, the profit and loss probability both are quite low when compared to direct stock investment.
But do remember, if your portfolio is not generating better returns than mutual funds, then its time for you to become a mutual fund investor immediately.
6) Risk and Return in direct stock investment and mutual fund investment…
The fundamental rule in investment is where is a high risk, higher is the probability of getting higher returns.
If you invest in high risk-high return stock, then the stock price will move in higher than the benchmark index and will lose more than the benchmark index in a downtrend.
You can see in the above image that Reliance Industries only beat the Bse Sensex in a big way.
Whereas other stocks Hdfc, L & T, and Yes bank gave more negative returns than the Index ( Bse Sensex).
In addition, Aditya Birla Sun Life Front line equity fund has given almost similar returns like the index ( Bse Sensex).
Again, You can notice the volatility in returns is very high in Individual stock in the above image.
As the above mutual fund scheme invested in a diversified portfolio, it almost has given similar returns like the index Sensex.
Finally, do remember, if you end up choosing more losers out of 3 to 10 stocks that you are investing your overall portfolio will suffer a lot and you end up getting losses instead of getting profits the index or mutual fund scheme.
Portfolio with two stocks…
In above image, you can see that if you invest in two stocks 50% each in Hdfc Bank and L & T, then portfolio return in 1 year is “-37.185%”.
Which is far below than the Index ( Sensex) and Aditya Birla Sun Life Front Line Equity fund.
Portfolio with 3 stocks…
In the above image You can see the portfolio return in 1 year is “-22.79”.
In addition, the portfolio has Reliance Industries, Yes Bank, and Hdfc Bank.
and the Portfolio Return is little less than the Benchmark Index and Aditya Birla Sun Life Front Line Equity fund.
Here, Direct Stock Portfolio has 3 stocks.
whereas the Sensex ( Index) has 30 stocks and Aditya Birla Sun Life mutual fund has nearly 50 to 70 stocks in the portfolio.
So, getting a similar return ( -24.7%) with 3 stock portfolio when compared with the well-dirersifed portfolio of the Sensex and Mutual fund scheme is not a good strategy ( good research).
Finally, it is very clear that mutual funds will generate stable and steady returns than the direct stock market investment.
“Digging a Hill for catching a Rat is not a Wisest thing to do”.
I mean in spite of spending a lot of time doing research and etc in selecting the stocks to invest and getting far below returns than the Index or mutual fund scheme is at all good thing to do.
Conclusion about Stock Investment vs Mutual Fund Investment…
Direct Stock Investment is like a Sword which has sharpness both sides.
Your first priority should be not to lose your hard-earned money, the profit is secondary.
Though the Stock investment does not require time to be spent like in the day trading, it also needs some mental stress.
Moreover, In your life apart from Investing in the stock market there are a lot of things to be taken care of like spending time with children and family, etc.
Direct stock Investing may make you depressed.
In addition, It will impact your professional life and also in family life.
Again, there is a famous quote ” Speed thrills but kills too”.
Similarly, the returns in the “stock market may give you a thrill, but the losses may kill your Financial Health” too.
In addition, Our primary objective in investing in equity is to get inflation-adjusted returns.
That can be achieved with the help of active or passive mutual funds without any mental stress.
Moreover, you should align your investment goal-oriented.
Also, read the article about the types of Debt Funds In India after Sebi Categorization.