Invest in Direct Equity or Mutual funds or both?

One of the top most questions that comes in each and every investor’s mind is among investing in mutual fund scheme or direct equity, what should he or she opt for? Investing through mutual fund and investing in Direct equity has a huge difference. Ultimately both the investment will be done in equity only but risk associated with both of them differs.  

When we invest in the equity shares of a company, we are, in legal terms buying the ownership of the company. The total amount that a company plans to raise is divided into small fractions called shares, which have a value in rupees. We become the owner of the company subject to the number of shares we owe. Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds.when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or more precisely, a part of the portfolio’s value. In direct equity investment we get shares. A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. And in mutual funds units are credited in our Demat account. The price of a mutual fund share is referred to as the Net Asset Value (NAV). A fund’s NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.

Direct Equity investment carries pure risk. It purchases shares from the chosen company. Company’s future performance has a direct impact on its share price. So any fluctuation in share price may increase or decrease your investment value. The best advantage of a mutual fund over equity is that there is reduced risk, since most mutual funds seek to invest in multiple stocks of different companies, bringing the overall exposure to risks down (As the loss in one may be set off by gains in another). However, the risk that prevails is that sometimes the entire basket of investment may not do well.

While mutual funds offer investors very decent returns over a period, equity stocks have the potential to bring the investor extremely high returns over a much shorter period. Investing in stocks can be tricky, and is usually only done by individuals with an in-depth understanding of market conditions.

Trading in individual or equity stocks usually comes at a huge cost. Sometimes, any profits made from the sale of a stock can be wiped out due to the high trading cost involved. This is one of the reasons why only those investors with a high-risk profile tend to invest in equity. Trading in mutual funds, however, comes at a much lower cost since these expenses are spread over all portfolios within the fund.

Equity stocks or individual stocks are very volatile by nature. The value of these investments could skyrocket or plummet within an extremely short span of time, leading to either massive profits or damaging losses. However, mutual funds are a much more stable form of investment due to its diversity. This makes it a less volatile form of investment since all gains and losses are spread out over a wider range of stocks. Individuals who invest in mutual funds enlist the services of a fund manager who takes care of his or her portfolio, making it an extremely convenient form of investment. However, investing in equity requires the individual to constantly monitor his or her investments due to the ever-changing nature of individual stocks. Investors in equity are dependent on their own knowledge of the market while mutual fund investors rely on the expertise of the fund manager to guide them.

Whether you wish to invest in mutual funds or equity shares will depend upon your knowledge of the market. Common investors have two options to invest in equities. They can either choose to purchase shares directly from listed companies using a Demat account, or they could hold shares indirectly by making investments in equity mutual funds. The right choice for you will depend a lot on your investment needs. Mutual funds, however, have been preferred over equities by numerous people for the following reasons:

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  • Professional Expertise

  • Instant and relatively cheap diversification

  • Efficient risk management

  • Active management of a portfolio

  • Non retail products

  • Asset Allocation

  • Innovative models for investment and withdrawal

  • Variety to explore

  • Lower transaction costs

  • Relatively less risky than direct equity

It is always preferable to invest in equity through Mutual fund route and that is too by SIP route. It will help to lower your risk in the long run. One can invest in direct equity too if he can digest the volatility of the market. Risk and return are directly proportional to each other. If you are ready to take risk direct equity has the potential to give maximum returns than any other asset class.

So you can have small exposure to Direct Equity through investing in Bluechip stocks. And for long term wealth creation invest in Equity Mutual Funds through SIP route.

Happy Investing !!!