Personal Investment: Direct Equity vs. Mutual Funds

Investments, may it be in direct equities or mutual funds, require a lot of time and consistent effort. While direct equity investing is considered more dynamic by the investor community, it comes with risk, too. Hence, only those investors who can understand the nitty-gritty of the equity markets can adopt this route to equity investments.

On the other hand, mutual funds provide much-needed ease while investing in the equity asset class. There are many benefits of investing via mutual funds rather than directly investing in equities or stocks. Mutual funds allow investors to pool their money for a diversified selection of securities managed by a professional fund manager.

It offers a range of innovative products like Funds of Funds (FoFs), Exchange-Traded Funds (ETFs), Fixed Maturity Plans, Sectoral Funds, and many more. Its diversification benefit helps mitigate risk to a large extent by distributing your investment across a diverse range of assets.

Equities are complex, and stocks one can buy come in a bewildering array of sectors, industries, sizes, financial structures, promoter track records, competitive scenarios, and much more.

Investing in a fund from a renowned fund house ensures that there is a full-fledged research department to keep tabs on all this; besides, there’s an experienced full-time fund manager with years–often decades–of track record of making equity investments. Moreover, their track record is publicly known and thoroughly analysed by researchers.

Compared to directly picking stocks, mutual funds are a more suitable route for many investors as it takes less effort, time, experience and specialised knowledge to get respectable returns from equity mutual funds rather than directly trading in equities or stocks.

Diversification, the most crucial aspect of investing, is relatively easier to practice for a fund investor. This is true of all kinds of diversification, including sectoral and asset types. A few fixed-income asset types, like bonds, are simply unavailable to individual investors. Apart from time, money, and diversification, there are other advantages. Generally, mutual funds are more tax-efficient. Also, they are definitely a lot more convenient, too.

At the same time, extremely beneficial methods like systematic investing plans (SIPs) are relatively difficult to implement for equities but are simple in the case of funds.