Mutual Funds vs Shares – Which is better to invest money?

MUTUAL FUNDS VS SHARES

Mutual funds can be defined as an investment vehicle which pools money from different investors having the same investment objective. The pooled money is then managed by a qualified fund manager, who decides allocation of the funds based on the investment policy of a particular scheme.

There are funds which invest in debt, equity shares or even both. There are thousands of schemes available today which are offered by various AMC’s. One may invest in any of these schemes based on the individual’s risk profile and time horizon.

Equity shares on the other hand are merely the units which entitle ownership to the shareholder in a company in proportion to the number of shares held by him. These equity shares are listed on the exchanges from where one can buy or sell these shares.

ADVANTAGES OF INVESTING IN MUTUAL FUNDS OVER EQUITY SHARES

• Professional management
The pooled money of the mutual fund investors is managed by a qualified and experienced fund manager who takes call on how and where the money is to be invested based on the investment objectives of a particular scheme. The fund managers have access to various research reports which help them in making informed decisions. The fund managers can even meet the management of the company before taking any call on investment in their securities.

While on the other hand an individual do not have access to such information and research reports and hence have to invest based on our own research only.

• Diversification of investments
Mutual funds provide the much required diversification, even to the small investors who invest a minimal amount of say Rs 500 which otherwise would not have been possible in case of direct equity investments.

Let us ask you a question! How much diversification would you be able to achieve if you have only Rs 500 to be invested in equity markets. May be 3 or 5 at maximum. However mutual funds allow you to diversify even your single penny, across different sectors and companies.

• Cost efficiency
Mutual funds charge only a minimal amount for managing investments. These charges are known as total expense ratio (TER) in case of mutual funds.

• Rupee cost averaging
Equity markets are volatile in nature. They do not move in the same direction. Hence, if one invests through SIP’s one will be able to average his investment cost.

For e.g. Suppose an investor is investing Rs 5000 p.m. in an equity mutual fund for 6 months.

So as you can see in the above figure, that every month Rs 5000 is getting invested on different NAVs. When the NAV of the scheme goes down,the number of units increases thereby providing rupee cost averaging.

• Liquidity
Mutual funds are very liquid in nature. Investors are allowed to withdraw their investments anytime they want. The redeemed amount will be credited in T+2 business days in case of debt mutual funds while in case of equity funds the amount will be credited in T+3 business days, where T is the transaction day on which the investor has submitted the redemption request. However one must take care of exit loads if redeeming their investments before stipulated time period.

On the other hand if one is investing directly into equities there are chances that one would get stuck with his investments and would not be able to make an exit.

INVESTMENT/WITHDRAWAL OPTIONS OFFERED BY MUTUAL FUNDS

• LUMP SUM
Mutual funds provide the flexibility of investing in lump sum. For e.g. If an individual receives a bonus then he can invest the whole amount as it is in any mutual fund scheme. Also, if one wants to save taxes at the end of the financial year, then he can invest lump sum amount in any ELSS fund.

• SIP
SIP or systematic investment plan is a disciplined tool for investing in mutual funds. In case of SIP, every month a fixed amount of money gets deducted from the investor’s bank account and is invested in the mutual fund scheme automatically. One can invest for as low as Rs 500 every month through SIP’s.

• STP
STP or systematic transfer plan is a combination of withdrawal from one fund and investment in the other. This tool is also very much similar to the SIP except of the fact that instead of bank account the money gets transferred from one scheme (redemption) and invested in other scheme (purchase). For e.g. Rs 500000 can be invested in a liquid fund and then a STP can be initiated from that fund to other equity fund/debt fund. The whole purpose of doing this is to earn higher returns than savings account on the lump sum amount and to reduce the volatility effect in equity funds.

• SWP
SWP or systematic withdrawal plan is the best tool for those investors who are in their retirement period and want regular income. In case of SWP, a certain fixed amount of money can be withdrawn on monthly/quarterly/half yearly/yearly basis as per the instructions of the client and is credited to the investor’s bank account.

DIFFERENT KINDS OF SCHEMES OFFERED BY MUTUAL FUNDS

EQUITY FUNDS

These funds invest at least 65% of the assets in equities only. There are various types of equity funds available in the market. These are:-

• Sectoral /thematic funds.
• Dividend yield funds.
• ELSS.
• Focused funds.
• Value funds.
• Contra funds.
• Multi Cap Funds.

DEBT FUNDS

There is a long list of debt funds available in the market. These funds invest primarily in money market instruments, CD’s, commercial paper, government securities etc. These include:-

• Overnight funds.
• Liquid funds.
• Various duration funds ranging from ultra short to long term.
• Credit risk funds.
• Corporate bond funds.

HYBRID FUNDS

These funds invest in a mix of both debt and equity instruments. These are also categorized in:-

• Aggressive hybrid funds.
• Conservative hybrid funds.
• Arbitrage funds.
• Equity savings.
• Multi asset allocation.

FAQs

Q1. How are shares different from mutual funds?
A. Mutual funds are the investment products which invest in equities, debt or in a mix of both debt and equity. Mutual funds invest in a diversified portfolio of debt and equity in order to manage risk effectively. One may select funds based on their liquidity needs, risk appetite and time horizon.
While shares on the other hand provide you the ownership of the company in which you have invested and your returns will depend on the performance of a particular stock.

Q2. Should I invest in stocks or mutual funds?
A. Investment in stocks requires a lot of research work and due diligence. Since the individuals do not have enough time/resources, they must resort to mutual funds where their money is managed efficiently and effectively at a very minimal cost by a professional fund manager.
On the other hand, if an investor invests directly in stocks he may not be able to achieve the kind of diversification as he can get in case of mutual funds.

Q3. What is the difference between mutual funds and share market?
A. In a layman’s term, share market is a place where one can directly buy equity shares over exchanges from those who are willing to sell. While in case of mutual funds, we give our money to mutual funds which in turn invest our money into equity shares or debt instruments as per the investment objective of the scheme and give us units in return at a particular rate called as NAV (net asset value).

Q4. Which are more profitable, mutual funds or stocks?
A. Well, one can earn profits either by investing in mutual funds or by investing directly into equity shares. But it depends on the investor, how disciplined he is and the quality of research he is applying while making direct investments in stocks. The mutual fund portfolio’s are fairly diversified which reduces the downside risk, while in case of direct equity investments the risk is very high as there is no proper diversification. Also investors can ride the volatility of the markets with ease by investing through SIP’s.
Hence one will be in a better position if he invests through mutual funds.

Q5. What is the benefit of diversification in case of mutual funds?
A. Diversification helps in reducing the risk. All the companies or sectors would not fall at the same time and hence protect the fund’s NAV from falling.

Q6. Can a mutual fund run away with my hard earned money?
A. Mutual funds need to hold their holdings in physical/electronic form with the custodians which is mandated by the market watchdog SEBI. What this means is that the holdings are with the custodians and not with the mutual funds houses.Hence they cannot run away with your money. A custodian can be a bank, a financial institution or a trust company.

Q7. What is the role of custodian?
A. A custodian is a financial institution that holds customer securities in electronic or physical form for safekeeping in order to minimize the risk of theft or loss of customer securities.

Q8. How can I invest in mutual funds or stocks?
A. The first and the foremost thing is that one should be KYC compliant in order to invest in any of these. Secondly one need to have a demat account in order to invest directly into equities however one can invest in mutual funds without having any demat account.

Q9. I am a new investor. What kind of equity funds should I prefer?
A. Since you are a new investor, you must go for diversified equity multi cap funds.

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