A common investor can take equity exposure through direct investments into equity or through Equity Mutual Funds.
There are couple of fundamental differences between the two.
When you invest in Mutual Funds, you give the power to a a Fund Manager, who is an expert, to manage your investments for you. Once invested, the Fund manager would buy and sell stocks on his own volition to deliver the best returns for his investors. MF managers are experts who have years of experience and expertise available with them. You are also backed by analysts and technology which helps them in their decision making on what to buy or sell in the markets. Mutual Fund managers charge a fees to manage your investments.
Many good online platforms are now available for investing in Mutual Funds. Look for unbiased advisers an wealth managers who have consciously chosen to only advise and execute investments through Mutual Funds. Platforms like ours do not charge any advisory, Transaction or Platform usage fees.
Mutual Funds come in all shapes and sizes. You have options for Conservative, Moderate or Aggressive Investors. You have different options for short term (less than a year), medium term (1–3 years) and long term investments (3+ years). You can even park your money safely for 1 week and get almost double the returns from your investments. You can start with with Monthly or Lump Sum (one time) investments as low as Rs 500 and get access to the best Fund managers in the country. Many of the Mutual Funds also come with ZERO exit loads or Exit loads for 1–3 months. Mutual Funds have tremendous liquidity. You get your money back in your account in 1–3 days post redemption.
Investing in stocks is something that you would need to do on your own. here you would need to rely on your own judgement on what to do in the markets. Here you would only need to pay brokerage for your transactions.
its a no brainer that beginners and even people who are not financial experts must invest through mutual funds rather than trying investments on their own. Countless people have lost tremendous amounts of money in just trying to save on the Fund Management Charges or trying to be smarter than the Fund Managers. Its typically what they call a “penny wise pound foolish approach”.
Considering all these points, MFs are indeed the best option available to the investors.
Here is something will help you to understand between the two.
Shares : A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business’s day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares.
Mutual Fund : An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Stocks are into equity but the mutual funds have different different categories :
1. Equity mutual fund :
Here the money/amount is invested in the stock of the companies. This category is highly risky as it is directly linked with stock market.
2. Debt mutual funds :
This fund invest amount in government bonds and securities. This are comparatively low risk funds.
3. Balanced fund :
This funds are mix of Equity and Debt. The division or ratio may vary fund to fund. This are mid risk funds.
Note : Investing in stocks, if you know stock market very well or in other word you are an expert in stocks. On the other hand, if you are not expert, invest your money in best mutual fund in the category. These funds are managed by fund managers, they have high experience in this domain.
Benefits of investing in mutual funds:
Professional Management – Individuals may not have the necessary skills to identify the right stocks. Not everyone can dedicate time to do research. Mutual funds offer investors the expertise of fund managers that aims at achieving investment objective of the scheme.
Low Ticket Size – As some shares quote at very high price, they remain inaccessible for small investors. However one can start in mutual funds which invest in various such stocks with as low as Rs. 500. Same level of diversification would need a very high minimum with stocks.
Fees & Expenses – For their services, mutual funds charge fund management fees and expenses which are capped under the regulations. For trading in equities one need to pay for DMATdmat charges as well as trading charges. However, investors should be careful not to buy funds with very high expense ratios.
Liquidity – Open-ended funds allow investors exit at the prevailing NAV subject to exit loads. This helps in financial planning. When an individual invests in shares, he is not sure if he can sell the shares in the market at fair value.
Risk Management – An individual may get carried away due to sentiment & may go overboard on a particular stock. However, a fund manager has risk management guidelines in place. There are limits on how much a fund manager can invest in each stock & each sector. A fund manager’s decision to invest in a particular share is backed by strong research conducted by the fund manager & team members.
Choice Of Funds – Investors can choose to invest in a scheme that suits their investment needs. For example, an aggressive investor may choose to invest in a diversified equity fund, whereas a bit less risk taker may opt for a balanced fund. There are funds catering to almost all needs.
Taxation – When an individual investor buys & sells shares before completing the tenure of 1 year, at the end, he ends up paying short-term capital gains. However, the fund managers may keep transacting in shares at varying intervals. If investor remains invested for more than 1 year in an equity fund, his gains are totally tax-free since STT (Securities Transaction Tax) is already deducted.