Is Investing In Mutual Funds Better Than Direct Stock Investment?

Is Investing In Mutual Funds Better Than Direct Stock Investment?

What are mutual funds? How are they different from stocks?

Mutual funds are a pool of professionally managed funds that invest across various asset classes. What a fund house does is that it collects money from investors who share a common investment objective and invest this pool of funds across the Indian and foreign economy. Mutual fund investors are allotted units in accordance with the investment amount and depending on the fund’s existing net asset value (NAV). The performance of a mutual fund generally depends on the performance of its underlying assets and the investors and sectors that it invests in.

Difference between direct stock investing and investing in mutual funds

Now if you compare direct stock investments with mutual funds, the former are far riskier. That’s because if you are new to the world of investing and do not understand market trends, there is a good chance of you incurring huge losses for your direct stock investments. Without having a thorough knowledge about the financial market and other sectors and industries, investing in direct stocks is just like venturing in unchartered waters. On the other hand, one does not need to have deep knowledge about the financial markets while investing in mutual funds. Even someone with a basic understanding about financial planning can consider investing in mutual funds.

Mutual funds offer active risk management. They are designed by financial experts who do a thorough research about the markets and build a mutual fund that is a mix of various asset classes and money market instruments. This is also why mutual funds are known to offer diversification. One unit of a mutual fund is a combination of multiple stocks. Investors can invest in pricier stocks through mutual fund investments which might not have been possible if they were to make a direct stock investment. That’s because the price of a single share of some companies is in thousands of rupees. With mutual funds, investors can own stocks of different companies in small quantities without needing large investment amounts.

Mutual funds offer SIP investment option, stocks don’t

The beauty of mutual fund investments is that you get the option of investing small amounts at periodic intervals, thanks to the option of Systematic Investment Plan. SIP is an easy and hassle free way to invest in mutual funds. Investors can choose a small investment amount which they are comfortable with and invest regularly in mutual funds. However, the small amount has to meet the minimum investment amount mentioned in the mutual fund offer document. With SIP, all an investor needs to do is complete a one time mandate with their bank following which, every month on a fixed date a predetermined amount is debited from the investor’s savings account and electronically transferred to the mutual fund. SIP has several benefits. Investors can benefit from rupee cost averaging. When the NAV of a mutual fund is low, more units are allotted and similarly when the NAV of a fund is high, lesser units are allotted. Stock investments do not have SIP options.

Some mutual fund investments offer tax benefit

If you are looking to save tax and also wanting to earn some capital gains over the long term then you can consider investing in ELSS. Equity Linked Saving Scheme is a mutual fund scheme that comes with a three year lock in and a tax benefit. According to Section 80C of the Indian investments of up to Rs. 1.5 lakh per fiscal year in ELSS are eligible for tax deductions. There is no such benefit in stock market investments.

Investing in mutual funds has its own perks, but investors are advised to consult their financial advisor before making an investment decision.

Mutual fund investments are subject to market risks, read all scheme related information carefully.

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