Which One Is Better – Investment In Mutual Funds Or Direct Investment Into Stocks?
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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
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
When you are investing directly into
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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.
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About the author: Rashmi Roddam is the director of WealthRays Group.
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