Equity Mutual Funds OR Direct Equity investing?

“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.” — Scott D. Cook, American businessman.

The lockdowns and the work from home environment resulted in more time in the hands of people and provided a fertile environment for dabbling in stocks. Markets reacted sharply world over in the face of a lockdown. People were cooped up in their homes resulting in lower expenses on food, entertainment, travel, etc. Those who worked from home saw their disposable surplus increase.

After seeing sharp corrections, the stock markets surprised everyone, not just recovering, but touching new highs in a matter of few months. Retail stock trading witnessed a spike during this period as people experienced quick gains. The availability of cost-effective trading apps, simple KYC processes, social media influencers, and chat groups for stock tips further attracted many people into direct trading. It started to seem very easy to make a quick gain. Over 1.4 crore demat accounts were opened in FY 2020 – 21 in India. However, let us pause to think through the strategy. (Source – NSDL, CDSL & SEBI)

Equities have the potential for long-term wealth creation. It is a simple asset class – however, it has not been as easy for all to create wealth from it. Should individuals invest directly? Mutual funds are a friendlier alternative to invest in equity. Of course, every investment has some risks, but here are some factors that make investing in equity via mutual funds better than direct investing for most.

Is it the ease that encourages you to invest in stocks?

Apps may make trading easier, but direct investing is complex than what most think. It requires deep knowledge and understanding of the markets. Thorough research and analysis of the companies requires time and effort. In addition, you need to stay updated on microeconomic and macroeconomic factors worldwide, including non-financial events like a pandemic, geo political developments, etc. It takes years to develop the foresight on how such events influence the markets. Mutual funds are relatively straightforward. An investor only has to spend time and effort in arriving at his asset allocation – which means the percentage of investment in debt and equity and then selecting suitable mutual fund schemes. After that, a professional team takes over. They are skilled and experienced to understand, analyse and invest in appropriate instruments at the right time.

Less emotional and stressful

While traversing its journey from 1,107 points to the 15K-16K levels, Nifty50 TRI delivered 12.8 per cent CAGR returns in the last 25 years. While the returns are impressive, this was not a linear journey. There were many ups and downs. This makes it difficult and stressful for a retail investor to calculate the best time to buy and sell. Many investors often make emotion-based, at times irrational decisions. Some are unable to handle market volatility and end up making the wrong investment choices. Investing in equity through mutual funds reduces emotional bias, especially, when done through SIPs (Systematic Investment Plans). (Source – MFI)

Build a well-diversified portfolio

To create a truly diversified portfolio, an investor must pick stocks across industries. This may not always be possible for an individual investor, leading to the portfolio being overweight in a few companies. On the other hand, a large cap or flexicap fund portfolio is diversified across various sectors as well as has a mix of small, mid and large companies. Even with a lesser corpus, the investor can diversify their investments, thereby reducing the risk of investing in fewer stocks. We all have heard of the saying “do not put all your eggs in one basket”.

Promotes investing discipline

The best way to grow your wealth is to stay invested for the long term. Equity mutual funds have the potential to beat inflation over time and also help in planning for long-term financial goals. Investing through SIPs in equity mutual funds instills discipline to stay the course of your financial journey. A few category of schemes have conditions on withdrawal to deter impulsive actions that may derail the investment strategy. For instance, Retirement Funds, that help an individual build corpus for the sunset years come with a lock-in of 5 years.

When we fall sick, we go to a doctor, as it can be dangerous to self-medicate or follow neighbor’s advice. Even a doctor, who specializes in one branch of medical science, needs to take advice of a doctor with other specialization, when the need arises. We do apply an occasional bandage for a minor bruise on our own. Investments are no different. If you are experienced, have the emotional maturity and can dedicate time and effort, you could consider direct equity. However, for all others, it can be risky to stake a substantial chunk of your total assets as tracking hundreds of companies and their financials is a not a job of single person. An asset management company employs team of sectoral analysts and fund managers, who follow a predefined investment process. For most individuals, mutual funds are a better way to invest in equity. All you need to do is monitor your portfolio and stick to your asset allocation in the investment plan. A better option is to rely on a finance professional who will not only help to select mutual funds that suit your needs, but also handhold you through market fluctuations. Happy investing!

The views are not an investment advice. Investors should obtain their own independent professional advice before taking a decision to invest in any securities. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s).