Equity mutual funds or shares: What is best for you? MintGenie explains

The latest progress within the variety of younger Indians investing in shares and mutual funds is an affidavit of this transformation in angle in the direction of investing. Another attention-grabbing trait of those children is their starvation and openness to study investing. Having interacted with many younger buyers in latest instances, a standard query they’ve posed is….… Should I persist with investing in fairness mutual funds or ought to I additionally spend money on shares immediately?

While there’s no straight reply to this query, right here’s an try and put this “equity mutual funds or shares?” debate in the right perspective, especially considering the changing mindset and attitude of young Indians.

First of all, there is no doubt that equity mutual funds are one of the best investment products for retail investors given the various advantages they offer – diversification, professional fund management, strong regulatory framework, low cost, affordability, transparency, convenience and so on. The strong regulatory framework and some of the other characteristics of mutual funds stated above significantly help protect the interests of the investors. 

However, they also come with certain investment constraints. As such, most equity mutual funds may not be able to deliver huge outperformance relative to their respective benchmarks. In fact, from a long-term perspective even 100-200 basis points of outperformance vis-a-vis benchmark can be considered reasonably good for an actively managed equity fund.

Direct stock investors on the other hand do not have any such investment constraints and can construct their personalised stock portfolio to suit their own risk appetite. So does that mean you should prefer direct stocks over equity mutual funds? Well, before we answer this question, let’s look at the type of flexibility that direct stock investing offers vis-a-vis mutual funds.

Ability to own a concentrated portfolio of stocks: When you invest directly in stocks, it is possible to own a very concentrated portfolio of say 5 or 10 stocks and allocate say 20% or 30% of your portfolio to a single stock. In contrast, a mutual fund scheme’s exposure to a single stock cannot exceed 10%. Even if the weight of a stock exceeds 10% due to price appreciation, a fund manager has to exit a portion of the existing holdings to bring back the allocation below 10%, which could potentially lead to an opportunity loss if the stock price continues to go up.

Ability to invest in niche investment themes: If you are a direct stock investor, you are able to construct a stock portfolio based on some niche investment theme(s) that you expect to play out from a short to medium term perspective. Though mutual funds offer thematic schemes, it is difficult for them to offer schemes based on niche themes having limited stocks to invest or which are not attractive enough from a relatively long term perspective.

Ability to invest in small cap or micro cap stocks without any constraints: As a direct stock investor, you are easily able to make your desired allocation to small cap or micro cap stocks, due to smaller ticket size of investment. For mutual fund schemes with large assets under management, it is often difficult to take reasonable exposure to smaller companies due to (a) liquidity constraints and (b) regulatory restriction that caps the combined investment of a mutual fund under all its schemes to below 10% of any company‘s paid-up capital.

While all these seem to be great advantages of direct stock investing, it is important to note that such flexibility comes with a substantial increase in portfolio risk. Therefore, if you have the necessary risk appetite and curiosity to explore stock investing, you could consider allocating only a small percentage of your portfolio to direct stocks to start with, complemented by long-term core allocation to other investment products such as equity mutual funds. And over time, you could decide on an appropriate allocation to direct stocks depending on your experience, risk comfort and success in achieving desired results.

However, it is important to avoid investing in stocks based on some arbitrary tips or news and instead conduct thorough research for selecting stocks and building your stock portfolio. And if you want to invest in direct stocks but find this process too complicated or do not have sufficient time to undertake such research, you could also consider availing services of SEBI registered investment professionals.

Nilesh Naik, Head of Investment Products, Share.Market (PhonePe Wealth)

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Updated: 16 Nov 2023, 11:31 AM IST