Equity Funds vs. Stocks: Which Is The Better Investment?5 min read
If you’ve recently taken the leap from conservative investor to someone looking for a higher reward while trying to curb the risk factor as much as possible, we’ve got you.
The common question that arises when taking bigger risks is: Where should I take my risk? In this case your options lie between the ever-so-popular Equity Mutual funds or stocks.
According to recent data, 31% of Indians are invested in Mutual Funds, whereas 10% invested in shares in 2022. So is the majority right? We help you decide which fraction you should fall into. (Source: https://www.moneycontrol.com/news/business/mutual-funds/diversified-equity-funds-outperform-benchmark-indices_364597.html)
First to decide which is better you must understand what each one is. Stocks are, to put it simply, a small part of the company, or a share of said company. While Equity Mutual Funds are funds managed by professionals that invest in stocks.
Who does the investing?
The investment in stocks is managed by the investor himself or you, while in mutual funds is managed by a professional fund manager.
Investment Flexibility:
Shares offer more flexibility as an investor has to invest in individual shares and thus has the option to invest in multiple shares of his own choice. Whereas, in mutual funds, the whole amount is invested in a diversified set of assets based on the investment purpose and goals of the investors.
Risk factor:
With mutual funds your risks are curbed, solely because of the diversification factor. Both are subject to market risk, as the famous disclaimer speedily reveals, yet shares run the risk of losing all your eggs just because you put them in one basket.
The market crash of 2008 offered some great examples, the S&P BSE Sensex index for instance, which is a benchmark index of the Indian stock market, fell by 52.5% from its peak in January 2008 to its low in March 2009. Whereas the average diversified equity mutual fund fell by only 44% over the same period. (Source: https://www.moneycontrol.com/news/business/mutual-funds/diversified-equity-funds-outperform-benchmark-indices_364597.html)
Allocation of funds:
Shares allow you to invest and hence own a part of respective companies. Whereas mutual funds allow investments in other revenue streams like assets or even bonds. This creates a diversification of your portfolio.
Let’s say you wish to invest in the Indian automobile sector. It is likely you will focus your capital on a single company’s stock or concentrate your capital in that sector. Hence the company’s performance will directly affect your portfolio. For instance, if there is a slowdown in the automobile industry, then your portfolio will be adversely affected.
On the other hand, if you invest in mutual funds that invest in the automobile sector, the mutual fund will hold stocks of several companies in the sector. This diversification reduces the concentration risk associated with investing in a single stock, as the investor’s portfolio will be exposed to a variety of companies within the sector.
Returns:
Because of the nature of shares and the amount of capital people tend to invest in them, a growth in a company’s performance can drastically impact your portfolio, giving you more gains than if you were to invest via a fund.
Like in the case of an industry giant we all rely on. According to a report, their stock price increased by over 40% in the year 2020, while the average return of mutual funds in India was around 8%. This means that if an investor had invested their stock in the beginning of 2020, they would have earned significantly higher returns compared to investing in mutual funds. (Source: https://www.valueresearchonline.com/stories/49126/reliance-industries-a-year-in-review/)
Resources and professional insights:
Fund houses spend time and money honing their data to make decisions. People who have dedicated their lives to understanding market trends allocate wealth. In the case of shares very often you invest based on your own knowledge and intellect as well as tips and data. The more time you invest into the markets and increasing your knowledge the higher your returns.
But where can professional advice pay off?
In 2017, the Securities and Exchange Board of India (SEBI) re-categorized mutual funds into different categories based on their investment objectives. As a result, a certain Micro Cap Fund was re-categorized as a small-cap fund, which meant that it had to invest at least 65% of its assets in small-cap stocks.
At the time, small-cap stocks were not performing well due to market volatility. However, the fund manager of that particular fund, believed that small-cap stocks offered good opportunities for long-term investors and continued to invest in them.
A decision that paid off, as the fund’s net asset value (NAV) increased by over 50% in 2017. (Source: https://economictimes.indiatimes.com/mf/analysis/why-dsp-blackrock-micro-cap-fund-is-among-the-best-performing-schemes/articleshow/62909041.cms)
Capital requirements:
Sometimes investing in shares can require a high capital investment to buy stocks of a certain company. Whereas in mutual funds, fund managers will pool together resources from various clients to give you percentage returns.
Consensus:
At the end of the day the decision boils down to you, your hunger for knowledge, know-how of the markets and investment capital. So if you are experienced in the market, one can rely on themselves, if not the best alternative is to rely on professionals and invest in equity mutual funds. . One offers a high risk and high reward whereas the other offers professional help as well as mitigated risks.
Disclaimer: Investment in the securities market are subject to market risks, read all the related documents carefully before investing. This content is purely for information purpose only and in no way to be considered as an advice or recommendation. Paytm Money Ltd. SEBI Reg No Broking – INZ000240532. NSE (90165), BSE( 6707) , BSE STAR MF Member ID – 53873. Regd. Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019. For more information visit www.paytmmoney.com
