Equity investments are a wonderful way of building wealth over the long-term and garnering inflation-beating returns. However, investing in equities is also prone to market risks. People who are not used to investing in the stock markets need to thus prepare themselves with a lot of research about individual stocks as well as familiarising themselves with macro and micro economic conditions. Added to the complexity is the need to follow different sectors and have an in-depth understanding about what is driving these sectors and the growth prospects of the individual companies that operate in them. Furthermore, a problem that many investors face while picking the direct equity route is that they have to diversify their portfolio themselves in terms of sectors, market capitalisation, investment strategy, etc. to reduce the risk of being exposed to just a few stocks that could fare badly during a market downturn.
Mutual funds make investments easy
There are cases where investors simply do not have the time or the resources to conduct this research by themselves and need someone to manage equity investments on their behalf. Equity mutual funds, which offer professional fund management at a fraction of the cost of hiring a private fund manager, are a good option for investors who would like to enter the equity markets but still do away with the need for making complex decisions by themselves. A fund manager manages a large pool of investments in a mutual fund. The fund manager has professional expertise and carries out the process of diversification on behalf of the investors as he or she picks stocks across the market to add to the mutual fund portfolio based on the scheme’s investment objective. There are many types of mutual funds such as large cap, mid cap, small cap, multi cap, sector-based funds, etc. Each fund states its investment objective in advance and also makes it clear what type of investment style the fund follows. Mutual funds are regulated in India by the Securities and Exchange Board of India (SEBI).
Differences between equity mutual funds and direct equity investment
While both equity mutual funds and equities have some similarities in the sense that you can pick equity investments across sectors, make systematic and regular investments in both and both provide excellent liquidity, there are some differences as well. Understanding the distinction between both can deepen understanding of how equities and different types of mutual funds work.
|Features||Direct Equity Investment||Mutual Funds|
|Skill levels the investor should have||High||Not required|
|Time to be spent by investor to monitor investments||High||Negligible|
|Control over stock selection||Total control||Partial control through selection of fund based on investment objective|
|Sale and purchase of shares or units||Only during time periods when market is operational||On each business day|
|Entry or exit from individual shares||Possible||The fund manager makes these decisions based on his team’s research and monitoring of each stock|
|Exit Load||Not applicable||Maybe applicable|
In short, we can say that investment in direct equities is more suited to expert investors and those who have skills and resources at their disposal both for conducting research as well for stock selection and monitoring. Most investors, irrespective of their skill level, would benefit from investing in mutual funds and relying on a professional fund manager to pick the stocks on their behalf.