MyValueResearch

DIRECT INVESTMENT IN EQUITIES VS EQUITY MUTUAL FUNDS

Investors often wish to know whether there is a difference between investing through the equity mutual funds and directly purchasing shares in the market. They often face dilemma which way to go and earn a handsome return.

At the onset let me clarify through this article that both options are different vehicles to reach the same destination i.e. successful investing in financial markets. Both options are subject to the risk of investing in equity markets and the returns achieved in both cases are subject to the performance of underlying stock markets. The vehicle that you select is largely dependent on your capability to assess various investment options, your risk appetite and the time that you can dedicate to this activity. If you are knowledgeable about investing, have lump sum money to purchase stocks of companies in different industries to allow for diversification and have the time to research stocks, then may be investing in individual stocks is a good starting point

Individual stocks or Equity shares are a type of security that signifies ownership in a company. Investors who own equity shares of a company are entitled to ownership rights, like voting for selection of directors on Board, share in profits of the company in the form of dividend or bonus shares, if Board of Directors and majority of the shareholders agree. The major difference of Equity investment from all other investment avenues is that it offers higher risk return trade off than any other investment avenues.

On the contrary mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. Here an experienced fund manger invests the collected amount in capital market instruments such as shares, debentures and other securities. Availability of huge research base, desired knowledge and experience allows a fund manager to react to any sudden developments in a timely manner. An equity mutual fund is a diverse holding of stocks that are managed on behalf of its investors. It allows investors to take advantage of a diversified portfolio without investing a large sum of money.
Besides its pro’s it is surrounded by the con’s as well. In case of Mutual Fund investment, Investors don’t have any control of where their money is invested. Moreover they cannot customize their investments.

Below written are some of the key factors that would help you in deciding whether to invest directly in the stock markets, or through equity based mutual funds.

The first priority goes to time factor. Investing directly in the stock markets is a time consuming activity and while choosing a stock lots of research needs to be done, even continuous review is also required during the entire holding period. On the contrary, investing via the equity mutual funds route is far less time consuming as compared to direct equity.
Second key factor is investing skill. Apart from the time factor, a successful investing demands a lot of skill, experience, knowledge of several market trends and cycles.
The third key factor, which helps you in deciding whether to invest directly in the stock markets, or through equity based mutual funds, is upside Potential. Diversification in many stocks may be beneficial in bear phase but at the same time it may have a holding down effect on the assets that are part of the portfolio. Diversification is not a characteristic of individual stocks and as a result the level of upside potential of stocks is far higher as compared to mutual funds.
The last but not the least is tracking of investments. Equity mutual funds disclose their portfolio on monthly basis and due to their diversification capabilities they invest in many companies, which make the tracking of the investments more difficult.
Here I am forwarding an example of the performances of banking stocks versus banking funds, which will enable you to have the clear scenario.

Scheme Name- 1 Year return
Reliance Banking Fund – 48.42
UTI Banking Sector Fund – 27.52
BSE Bankex – 24.40

Bank- CMPAs on 09.04.07- CMPAs on 09.04.08- 1yr gains (%)SBI- 932.53 1693 81.55
ICICI Bank- 858- 836.6- 2.49
HDFC Bank- 971- 1379.85- 42.11
PNB- 456- 518- 13.60
BOB- 225.24- 293.65- 30.37
From the above comparison tables we can conclude that the investor who has picked a good scrip say SBI at the right time has earned the fairly good returns as compared to other scrips (ICICI Bank, HDFC Bank, PNB or BOB) and on the contrary the investor who opt for mutual fund has been awarded with a moderate return.

Conclusion
Take whatever route you desire, ultimately it is the investment skill that counts, whether personal or that of mutual fund manager. But mutual funds are an ideal investment allowing small investors to benefit from diversification with a small amount of money. Choosing the right fund is a decision on how much risk investors are willing to take against their expected return on their investment. On the contrary direct investment is a lot more exciting since money is made and lost by the minutes. If you have a small pool of funds it is easier to beat the market if you can spot some good value stocks. If the pool is large then given the poor depth of the markets beating the index is not always easy. Whatsoever suits you the certain fact is disciplined investment in equity markets is always worthwhile be it directly or through mutual funds.