Mutual Funds vs Direct Stock: Things you need to know before investing

Mutual Funds vs Direct Stock: Things you need to know before investing

Investment is one of the most important tools of securing your future or generating persistent income. There are various channels of investment to bring about the objective result. But It’s important to know the depth of the pool in which one’s diving. Therefore, it’s important to have thorough knowledge of the risks involved in investing. In this blog we will try to make your concept clear on investment in mutual funds and stocks. 

First, let’s just get to know what Mutual Fund and Direct Equity is…

A Mutual Fund is an investment fund which is pooled in by a large number of investors with similar financial objectives to invest in various securities like equity, bonds, assets and other money market instruments. It is managed by professional fund managers and with their extensive experience and analysis, it is invested accordingly to generate higher returns.

Direct Equity/Stock are directly invested funds in a share capital of the company. It is the ownership of a certain part (share) of a company according to the individual investment. The shares can be sold and bought at any time but can only be withdrawn during the dissolution of the company. 

Difference between Mutual Fund and Direct Equity/Stock:

  • Management 

Mutual funds are professionally managed by investment bankers and fund managers. It does not require constant attention from the investor, instead your fund manager will do it for you. They work as an intermediary between investors and companies.

Direct equity is managed by the investor itself as it is directly invested in publicly listed companies. When it is directly invested there will be no intermediary between the investor and company. And will need constant monitoring so as to not incur any loss.

  • Number of Instruments  

In Mutual funds, the money is invested in a number of securities and instruments, which makes a diversified portfolio of investment. When the money is invested in numerous companies and securities, the return generated is the average of all investments. 

Whereas, In Equity stock, the money is invested in a particular company and has to be invested separately for each company and its instrument. The returns generated are thus according to the individual stocks of the company.

  • Risk Involved 

As Mutual funds are managed by professionals and are invested in diversified portfolios, it is less riskier than direct equity investment. When the funds are invested in different stocks, if one company does not return well, the other company may generate good returns. And that is the core reason for investment in Mutual funds.

In Equity share, whole fund is invested in a single entity, the return generated will be completely based on the performance of that particular entity. So if the company performs well then there’s no problem, but if the company does not perform well then the investor may suffer loss or generate no return.

  • Tax Benefit 

In Direct stock investment there are generally no tax benefits whereas in ELSS scheme mutual funds, one can claim tax benefit upto 1.5 lakhs on return. It highly depends on the scheme and type of investment, be it Direct stock or Mutual fund investment. 

  • Return on Investment 

The return on investment completely depends upon the performance of companies. If guided right and invested in the right company, direct stock can generate higher returns. Mutual funds are generally a safer option to invest in, as they are invested in a small proportion in various companies. When the investor has made their investment a cornerstone to rely upon and directs it according to the market, then they can earn comparatively higher returns than Mutual funds. 

  • Expediency of Investment 

The limit for share prices may be provided according to the company and it may not be convenient to buy shares frequently over time and again whereas, Mutual funds can be invested with as low as Rs.500 by opting out for recurring investment. 

  • Fees charged 

For Mutual funds investment, management charges and expenses will have to be paid – subject to regulation Whereas Equity charges are mainly for opening a demat account.

If a person’s core focus is on the fluctuation of the financial and stock market then they can earn a good deal in direct equity stock. If not, then the risk may be higher compared to mutual funds. Mutual funds are managed by experts who give their central attention to the financial and stock market to reduce as much loss as they can and derive the most returns. So therefore, it’s very important for an investor to go through the history and process of investment before investing in any security and have a fine understanding of the stock market.