Investors think even in the mutual fund, investment goes to direct stock, then why should not invest in direct equity. The mutual fund will have expense ratios, and there will be no control on the portfolio of its fund. This may be one reason that investor gives more preference to stock. However, mutual fund investment can give you more benefit compared to investing in stocks. In this blog post, we will discuss today Mutual funds vs Stocks: – which option is better?
Before, we discuss the advantages of mutual funds let us explain for the benefit of investors, how mutual funds work.
Without the jargon? The mutual fund is the route of an investment where money collected from investors and allocated to different financial instruments with the aim to provide returns.Each fund will have its own investment objectives.On the line of these objectives, fund manager decides where & how much amount should get invested.
Since the investment decisions are being taken by a person, we call this an actively managed fund.
Mutual funds managed by asset management companies (AMC). AMC appoint fund managers to manage different mutual fund schemes and ensure that the scheme investment objectives are met. For fund management and other services provided by AMC, they charge a fee to the investors. These expenses charged against the assets of the fund and adjusted in the price of the unit.
Let us now discuss the major advantages of investing in mutual funds versus directly in stocks.
Risk Diversification in Mutual funds
The biggest advantage of investing in mutual funds vs stock is a risk diversification. Every stock is subject to three types of risk:-
- market risk,
- company risk
- sector risk.
If company having the good balance sheet and doing good in numbers but the market is not in trend, stock price may fall. similarly, if a market is trending but company number is not good, not performing well with their balance sheet stock price may fall.
Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors.Hence mutual fund risk is much lower than individual stocks.
Smaller capital Required
Investor requires large capital to create a diversified portfolio in stock, on the other hand in a mutual fund you can create a diversified equity portfolio with low capital.An investor can have a benefit of ownership of diversified stock of portfolio among different sectors with a much smaller capital.You can buy units in diversified equity fund with a low amount as much as 5000 RS. Or even lower in some schemes.
Fund manager expertise
Investing in stock may require knowledge or skills to judge the performance of a stock, or how it can give you risk-adjusted return.
Mutual funds managed by professional fund managers who have sufficient expertise and experience in picking the right stocks to get the best risk-adjusted returns, and it is his responsibility to gauge the performance of the stock and churn the stock portfolio as when required
Since mutual funds buy and sell securities in large volumes transaction costs on a per unit basis is much lower than what retail investors may incur if they buy or sell shares through stock brokers.
Discipline in investment
In mutual funds, you have Other options as well to invest, like SIP, where you can make periodically invest as we do in recurring deposit, that helps to average out the cost of investment and build a corpus for goal-based investing.
While in stock as well brokers gave the same option to invest as we say SEP, but that not fulfill the purpose of diversification in investment.
With the Sip, you could have discipline approach for your goals which you have created in financial planning like child education, retirement planning, car financing.
For every specific goal, we can set aside some monthly amount to accumulate corpus for that goal.
Best Read: Top 5 best liquid funds to invest in 2018
In a mutual fund, you can invest money in a product according to your needs, if you do not want take risk, you can invest in debt fund. If you want to enjoy return and safety of your money, then you can also go to the balanced option.If you are looking for the substitute for saving account then liquid fund can be a good option, so as per your need you can invest your money. Dividend option is also open for retirees to get monthly dividend as regular income.
Mutual funds vs stocks – Conclusion
In this blog post, we have discussed the advantages of Mutual funds vs stocks which can be a good option for the investor. If you good at numbers and on balance sheet, have the expertise to pick the right stock, can devote some time to attend general meetings, reading a balance sheet and income statement, you can invest directly in shares.
In reality, a vast majority of retail investors neither have the expertise nor can they devote sufficient time to this.
For retail investors, therefore, investing in mutual funds is a much better option than investing in stocks.
Follow us on QUORA for Question and answer or comment below.