What’s Better? Investing in Equity Mutual Funds or Directly in Stocks

Investment and risk taking go hand in hand. Whenever you are putting your hard-earned money into something you hope to receive great returns from, you are running the possibility of either becoming richer overnight or losing that much and even more. To put it simply, an investment is a gamble which requires considerable research, vision, and educated guesswork.

It is widely assumed that making investments through mutual funds is a safer option than the latter. This is primarily because it is handled by professional fund managers who ensure that they select stock portfolios which guarantee successful long-term returns. . And sources tell us that an increasing percentage of the average Indian population is turning towards mutual fund investments. And here’s why.

Professional money managers

Mutual fund investments require professional help from a fund manager whose only mandate is to expressly monitor and manage the investments that his fund makes. As an investor, you do not have to spend time examining the fund manager’s personal history. Rather, you should go by his or her past experience – the kind of returns they have managed to procure over the years – and decide on the basis of that. The many components to making an investment, which include picking stocks, tracking them, making sector and asset allocation, and booking profits when required, are all handled by the fund manager. The investor only has to check from time to time if the fund manager is sticking to the mandate and delivering a return superior to the corresponding index.

Stable returns

More often than not, mutual finds ensure more stabilised returns on your investments than direct investment in stocks. The latter, though it holds the possibility of procuring even higher returns than the ones garnered from mutual funds, always entail a greater risk, considering that a stock value and price can change dramatically within the matter of days.

Tax-benefits and lower cost of investing

Mutual funds provide a tax benefit of up to rupees one lakh under Section 80C when you invest in an equity-linked savings scheme, which has a lock-in period of three years. Additionally, there is no capital gains tax on stocks sold by the fund, as long as you hold your equity fund for a year or longer to avoid short-term capital gains tax on the investment, which can subsequently lead to significant benefits for you as an investor in that fund. This is in comparison to the amount you have to pay if you’re making direct investments on portfolios that you choose yourself. At the same time, the cost of investing is significantly lower for mutual funds than direct stock investing. While you will be required to pay 0.5 to one percent as brokerage along with additional demat charges for buying and selling shares directly, mutual funds pay only a fraction of the brokerage charged to individual investors on account of their scale. Additionally, mutual fund investors do not require a demat account.

As can be seen from the above discussion, it is not the mutual fund that carries the risk, but the underlying investments where the mutual fund has invested.