An equity investment is money invested in a company by purchasing shares of that company in the stock market (traded on a stock exchange). Equity investment brings capital gains and dividends, and helps you diversify your portfolio. Generally, you would invest in equities if you have adequate knowledge of the stock market. However, more often than not, investors don’t have enough knowledge or time to research the nitty gritty of the stock market. In that case, you’d prefer to delegate this work to a professional fund manager, eg in the case of mutual funds. Some people like having control over the flow of their money, and thus might consider going the linear way – direct equity investments. Let’s break down the two alternatives namely mutual funds and direct equity investments, and find out which one suits which investor profile.
Investing in direct equities versus investing in mutual funds
As mentioned previously, investing in equities means you need to have a working knowledge of the stock market. There are a plethora of factors to consider such as industry, sector, size and structure of the company and management track record, and the overall macroeconomic condition of the economy. If you lack the acumen and time to use the tools for fundamental and technical analysis and research for your investment, investing in equities would present itself as a blind gamble.
On the other hand, mutual funds are managed professionally by fund managers or money management experts, and thus become a more suitable route for participation in the market.
How you invest in mutual funds is akin to being driven by a chauffeur. You give the steering wheel of your financial vehicle to a fund manager, who is in charge of running mutual fund investment schemes for a number of people. These fund managers are usually a part of an Asset Management Company (AMC), and have an extensive research team at their disposal. Besides, on a large portfolio, mutual funds end up reducing costs, reaping the benefits of economies of scale. Mutual funds are developed with objectives that determine the level of risk they operate at and are regularly tracked for performance. In addition to the greater scrutiny, mutual funds are regulated by the market regulator Securities and Exchange Board of India (SEBI).
There’s no gainsaying that mutual fund investments are more positively positioned to bring good returns over a period of time.
Investor profile mapping
Let us look at the parameters that help understand how the investor profiles for each of the two alternatives differ.
Time commitment: If you have the requisite time and bandwidth to conduct analysis and monitor your portfolio, only then is it practical to invest directly in equities.
Limited knowledge and pivot to Professional management: If you have the skill-sets required in tracking equity investments, then go for the direct route. However, if you lack the acumen to do so, hand it over to a fund manager under the mutual fund route.
Breaking into the market: Often the equity shares are available at such a high price, they remain inaccessible for small investors, as against mutual funds which invest in various such stocks with as low as Rs. 500.
Spread risk: In order to balance the risk, you’d ideally need to have an investment portfolio to diversify. Since mutual funds manage money on behalf of many investors, they’re in a better position to spread this risk.
Economies of Scale: Drawing from the above point, as an individual you have a limited portfolio. If you choose to operate in the market on your own, you’d be paying more in terms of costs and risks. Whereas mutual funds ends up reducing costs on a large, scalable portfolio.
Fees and charges: Mutual funds and AMCs charge fees and expenses for their services, capped under the SEBI Regulations. This cost is not a part of the direct equity investment.
Choice of funds: While mutual funds allow you to incline your portfolio towards either debt or equity funds, it does not allow the choice of each individual stock.
In a nutshell, it can be concluded that you opt for a direct equity investment when you have the skill, knowledge, time and acumen to do so. If not, opting for a mutual fund investment is the best route, whereby you can reap the benefits of professional fund management and risk-driven return. Investing is a complex exercise, conducted in a highly dynamic world. For the majority of retail investors, the choice is often bent towards the mutual funds due to the comfort and easy availability online at Finserv MARKETS, where you can open an account and get financial planning tips and investment advice in just a few clicks.
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