Which One Is Better – Investment In Mutual Funds Or Direct Investment Into Stocks?

At the end of the month, let us say, you get your salary in cash. Would you go to your bank and deposit that money in your account? Or would you give that cash to another person whom you believe to be an expert in doing that kind of work? Both options may look fine to you. If you have back-to-back meetings with your clients and don’t have the time to go to the bank, what would you do? Ask your expert to take care of it?
This is what would typically happen in a mutual fund investment. Your investment in a mutual fund scheme will be handled by experts – fund managers who would create a portfolio and make investments on your behalf. But in case of a mutual fund, a fund manager makes investments for various people who have invested in a particular scheme and the investment is done collectively.

Mutual funds provide good returns. However, it is entirely dependent on the portfolio selected by the fund manager. Investment in mutual funds depends on the net asset value of the fund that will be calculated after taking into consideration the expenses and the cost incurred by the scheme. Exit from equity funds within 1 year of investment attracts exit load of up to 2%. Post 1 year, returns on mutual funds are tax free and there will be no exit load.

Mutual fund investments are liquid in nature as you would receive money within a week on redemption. Although mutual funds can be held in Dematerialised form, there are many administrative hassles in redeeming a fund, transferring a fund, holding multiple folios, etc. Mutual fund investment is ideal for those who are ready to hold it for at least 1 year – so that it does not incur extra costs. There are two options that investor can choose in mutual funds – the dividend option where dividends will be credited directly to the investor and the growth option where dividends are re-invested. There is a tax benefit of up to Rs 1 lakh under 80C when you invest in an equity-linked savings scheme, which has a lock-in period of 3 years.

When you are investing directly into stocks, you are at leisure to select them and create your own portfolio. Shuffling of portfolio gets easier by investing directly into stocks. If a particular stock is not doing well, one can exit easily and immediately opt for a better performing stock.

Also, when a particular stock has reached your target, you are at liberty to book profits and reinvest it immediately. As a shareholder, you will be entitled to attend annual meetings and be a part of the company’s decisions. The cost of entry and exit is the brokerage that needs to be paid to the stock broker. Research, time and guidance are the key factors when you are investing directly into stocks. Technical and fundamental analyses provide clarity to an investor before making investments. One should have enough time for analysis and should track his/her investments on a day-to-day basis to make some decent money in stocks. Another option while investing directly is to go with expert’s opinion and invest in stocks accordingly.

Stocks can be held in Demat form and are highly liquid. Technical analysis will help traders with entry and exit in stocks on a day-to-day basis which is not possible in mutual fund investment. As for redemption, a shareholder will receive money within 2 working days on sale of stocks. Shareholders will receive dividends, along with profits, on shares. Direct stock investment can be held for short, medium or long-term targets. Speculative trading is possible through derivatives, which is a high-return, high-risk product. Tax benefit under 80CCG can be claimed for shares with a fixed lock-in period of up to 1 year.

Differences
Features	Direct stock investment	Mutual fund
Investor's control on stock selection	Complete control	No control
Buying/selling	Buying/ selling possible at any point of time on trading day	Buying/selling possible only at the end of trading day post NAV computation
Entry/exit from single stock	Possible	Not possible
Demat account	Mandatory	Not mandatory
Speculative trading	Possible	Not possible
Exit load	No Exit load	Exit load up to 2%
Individual selection of stocks	Possible	Not possible

Similarities between direct stock investment and mutual fund
For direct stock investment or investment in mutual fund, one can choose his/her portfolio based on requirements. Based on your own analysis or expert’s advice, you can create a portfolio of pharma stocks, technology stocks or a diversified portfolio of banking, technology and pharma. You may choose a stock based on its market cap (large, mid or small cap), based on index, etc. Similarly, mutual funds also have sector funds where portfolio will be based on a specific sector. They are also based on large, mid or small cap, or diversified funds. Monthly or lump sum investment is possible in both cases.

Similarities
Features	Direct stock investment	Mutual fund
Sector based	Yes	Yes
SIP investment	Yes	Yes
Returns tax free after 1 year	Yes	Yes
Tax Benefit	Yes, under 80CCG	Yes, under 80CCG, ELSS – 80C
High Liquidity	Yes	Yes
Investment in international indices	Yes	Yes

Our recommendation: It is good to invest in both stocks (directly) and mutual funds and not get your investment skewed towards any one product. Investments can be made in mutual funds for a period of 3 years and for a short-term target up to 2 years, stocks should be chosen. It is recommended to book profits for both at regular intervals and re-invest the money to enjoy compounding returns on investments.

About the author: Rashmi Roddam is the director of WealthRays Group.