General, Investment, Mutual Funds, Stock Market

Which is better- Investment through Mutual Funds or Direct Investment in Share market

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Money is something that takes an integral part of life. So, many people try finding ways to increase their financial status. One such way is investments. We have several investments such as mutual funds, stock market, etc. Risk can be treated as a synonym for investment. So, people often think and worry when its time to invest in some market funds. One such confusion is whether to invest in mutual funds or in direct share market.

Mutual fund is a scheme that takes money from many people and together invests in financial market to gain profits. Mutual funds are a collection of stocks and bonds that are managed by fund managers in an Asset Management Company. It is simpler when compared to share market because it is properly managed by skilled fund manager and its passive nature makes it easier to manage it. Fund manger will take care of diversification to lower the portfolio risks. Based on your risk management ability you have wide range of equity oriented mutual funds to choose. When you invest in mutual funds you get tax benefits. Some popular equity oriented fund category includes, Large cap mutual fund, Small and Mid-Cap mutual fund, Sectoral mutual fund, Diversified Equity mutual fund, etc.

Mutual fund is a collection of stocks and bonds from several companies. SBI BlueChip Fund-Reg(G) is one of the top mutual fund schemes. The standardization offered by mutual funds is good for a new investor.

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Share market, where people buy shares (ownership) from the company. Shares represent small portion (physical) of a company’s value in stock market. The principle thumb rule in share market is to ‘buy when low and sell when high’. It is an active form of investment where buying and selling of stocks is handled by yourself. If you are planning to invest directly in the shares, then you need to possess aspects such as adequate funding, expert knowledge, high degree of patience etc. You need to watch your investment portfolio regularly for the updates that may have an impact on the stock market. Timing is very important in share market. If stock market performs as expected then you get huge return, but when it performs against the expected trend you may even lose your principle investment. Shares are strategies to improve growth of business.

Now that we know about them we can continue our discussion. Let us start with a comparison between them.

RETURNS: Mutual funds ensures that the people (investors) get a stable return on their investment. Mutual funds project less risks. But, when it comes to direct investments in share market, though it may give higher returns than mutual funds it involves lot of risks and there is no stability in returns.

In share market there are several factors that influence the price of the stock, so you may or may not get adequate returns if not managed properly. Since mutual funds are diversified (hybrid mutual funds), you have stable returns.

MANAGEMENT: Mutual funds are managed by a fund manager in an AMC. He is responsible to decide where and when the money should be invested. The person who invests money need not worry about where the investment goes as long as he gets a fair return. But, in share market the investor must be smart enough to pick the correct stock to invest. Business people who keeps track of daily report can invest in here. You need to have a look into the diversified market to select one. This involves spending a lot of time.

RISK: It is an important factor to be considered. Risk in mutual fund is much lesser when compared to share market because we have someone to manage our investments in mutual fund scheme. But, in share market you need to have a close look at the market trend and should be able to choose correct place to invest in and we have greater risk of ending up with loses.

In mutual funds, since they are diversified, even if some of the stocks are dropping down, the negative effect is mitigated by the rest of the stocks. If, from a total of 10 stocks, 3 are dropping the rest of the 7 stocks prevent your overall value to fall.

MANAGEMENT CHARGES: In mutual funds, you need to pay fund management charges, a front-end load upon initial purchase, back-end load upon sale, early redemption charges, etc. In direct investment in shares you need to pay brokerage to the stock broker which when compared to management charges in MFs is less.

EASE OF INVESTMENT: The passive nature of mutual funds makes it easier to manage them. In mutual funds you have Systematic Investment Plan (SIP) which allows you to pay amount in periodical interval of time. It allows you to invest in lumpsum amount or SIP.

Mutual funds provide you flexibility to choose from wide variety of MFs, based on your financial status and even you can invest through fixed monthly SIP. But in stocks you do not have such option since there is a constant price fluctuation and are not easy to manage.

TAX: You can claim tax benefits on mutual funds under section 80CCG as well as 80C if it is an ELSS (Equity Linked Savings Scheme). Direct investment gives you tax benefits only under 80CCG.

STRATEGY: The investment strategy in mutual funds is usually longer-term strategy which ensures good returns. Shares give you good returns if you buy and sell stocks at right time.

If you want to investment in a place where you have less risk, good returns and enjoy tax benefits then mutual funds has an edge over share market. In recent days there is a constant rise in stock market trends, but we cannot assure such trend and we never know what happens in a stock market because there are several factors that influence stock market.

Finally, I would say it is not easy to conclude which out of the two is best. So, the conclusion would be – share market can provide more returns than the mutual funds if one can manage it properly by handling the risks. Remember that the returns from share market are not always stable and you may not handle large portfolio yourself.

 

 

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CA Rachit Jain

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