Why investing in mutual funds is better than stocks

Should you invest in a mutual fund (MF) scheme or buy direct stocks on your own? The answer to this important question depends on your risk appetite, which means how much risk you are able to take for getting a higher return form your investments. People assume that investment via MFs is always a safer and much better option than buying stocks. To a large extent, this is true and applicable to the investors not having enough time and expertise in managing their money. Let us understand in detail: -

Return on investments: The first thing which comes to an investor’s mind is the return he is going to make on his investments, and with respect to MF investment, the same would be less volatile as compared to the direct stock investment. Investing in stocks directly is a much riskier proposition, but at times, it can give you way more returns than MFs. But, that is subjective and only applies to an investor having the expertise and time to do it.

Cost of investments: MFs charge administration fee in the form of an expense ratio, annually. However, in a brokerage, you pay for stock trading for every transaction you perform, and end up paying the brokerage for every transaction. In case of MFs, we have an idea about the cost incurred for the investment but for stocks, the cost will depend on your volume of transactions.

Diversification of portfolio: It requires good amount of money to create a good diversified stock portfolio and this shortcoming of stock investment is remarkably overcome by the mutual fund. Because they receive money from public at large, ranging from a very small amount say Rs 5,000 to a large sum of a crore or more which gives them huge leverage to invest in stocks across categories. This is by far the best advantage one can see with respect to MF investments.

Professional managers: Intensive research on companies and the overall industry is required before investing in stocks whereas mutual fund house has professional fund managers along with a team of analyst to do all the research before picking the right stocks. They keep tracking them and use their skill sets to derive higher returns and mitigating the risks. Keeping watch on performance of every stock in your portfolio is not possible for every investor whereas Professional fund managers of MFs do this on your behalf.

Time saving: Investing in stocks require a lot of time in deciding on which shares to buy where as it takes lesser time to learn about each mutual fund. An investor need not keep watch on stocks held by MFs as in case of Individual stock investments. These investments allow investors to invest along with their day to day business without demanding much time to look after the investment in case of direct stock buying/selling.

Tax benefits: MF also offers you to get the tax benefit and savings U/S 80(C) via equity linked savings scheme (ELSS) which gives you a tax savings of up to Rs 1,50,000/- whereas stock investments don’t have any tax benefit like this. Another important tax benefit is in the form of no capital gains tax on stocks sold by the fund which means if you have invested in a mutual fund and hold it for a year then you don’t pay any capital gains tax, your fund manager will keep buying stocks and even if they do it for short term i.e. less than a year, there no tax impact on you. Whereas in comparison on your direct stock investment, if you sale any stocks within one year of buying it, you end up paying short-term capital gain tax at the rate of 15%

Investing in MFs is always a better option than investment in stocks in case you want to invest via sip i.e. monthly any amount even if it is as low as Rs 500 a month or Rs 2 lakh and it helps you avoid the risk of timing the market. With respect to your lump sum investments also, MFs reduces all the risk of you not being able to spend time or having expertise to understand the trends and market at large. Invest in equity via mutual funds only.

ACCUMULATING WEALTH IS A CHOICE

• Intensive research on companies and the overall industry is required before investing in stocks
   
• However, mutual fund house has professional fund managers along with a team of analysts
   
• Investing in MFs is always a better option than stocks if investing via systematic investment plan
   
• Mutual funds are safer for lumpsum investments, even with less research or understanding on your part

Rishabh Parakh is a Chartered Accountant and Chief Gardener of Money Plant Consultancy, one of the fastest Tax & Financial Service Provider Company. He can be reached at rishabhparakh@moneyplantconsulting.net