What is the fuss?
Retail investors have multiple options to invest into equity. Direct stock investing, and investing via mutual funds are the two most common ways. But which one is better for your? In this post, I answer this ageless debate in a question and answer format. The reason for this format is, there is no one answer which applies to all investors. The QnA format will help you decide which investment method suits you better. Lets get to it.
Q1: Which gives higher returns?
Investors invest to get return on their investment. Getting the highest possible returns is usually the goal. So, between direct stock investing, and mutual fund investing, which gives higher returns?
Direct stock investing gives higher returns.
Stock investment gives higher returns in long run (> 3 years). You choose the buy and sell price of a stock, enabling you to make higher gains. You make use of buy/sell features such as limit order, stop loss, GTT (Good Till Triggered), to buy and sell at the right price. This maximises your returns as money is made when you Buy Low and Sell High.
Mutual Funds have to invest on the date of your SIP (Systemic Investment Plan date). Even when the stock market is expensive on the date of your SIP, Mutual Funds are required to invest in the stock market, and allocate you the SIP date NAV shares. This requirement makes mutual funds buy good stocks at at expensive valuation in your portfolio, leading to less returns.
Mutual funds also charge a management fees in the form of expense ratio. This expense ratio is typically in the range of 0.5% to 1.5% of your invested amount. This further eats into your overall returns.
Q2: Which requires financial knowledge?
Financial Knowledge means understanding of stock market technicals, company’s balance sheet, cashflow statements, income statements. These are the basics building blocks of stock investing.
The good news is — you can invest with, or without financial knowledge. The mode of investing will vary based on the level of your financial knowledge. So, which mode of investing requires financial knowledge?
Direct stock investing requires financial knowledge.
Vice versa, you can invest without financial knowledge via Mutual Funds.
Can you invest in stocks without any financial knowledge? You can, but it is not recommended. As you will end up investing based on your perception of a company. Or worse, rely on tips and social media influencers to make investment decision.
With less to no financial knowledge, you are safe in the hands of a mutual fund manager. The mutual fund manager is a professional, with an education degree in finance, and 5+ years of experience in investing. The fund manager has an army of analysts who support research, modelling, and stock recommendations.
Q3 Which requires less to no investment of your time?
Time is priceless. Once gone, it cannot be bought back, unless you have access to a time machine. Leaving jokes aside, managing money is a time consuming process. Apart from the time it takes to research and invest, time is also required to track new investment opportunities, review existing investments, and take portfolio rebalance decisions.
So, which mode of investing requires less time of the investor?
Mutual fund investing requires less to no time of the investor.
Choosing a mutual fund scheme to invest in, may require some time investment. However, this decision becomes easier with the help of a financial advisor. Or, one can go with a reputable fund house such as Kotak Securities, Axis Mutual Fund, Tata Mutual Fund, Motilal Oswal, Mirae Asset Management, Parag Parikh Fund etc.
Once you have started a SIP in a mutual fund, there is little to no time required of you. You can review your mutual fund investment once every quarter, or year. That should suffice.
Stock investing is totally different. Not only does it require time to invest, but requires time to track, rebalance, and understand macro/micro environment. Apart from all this, the constant tension in direct stock investing is not a thing for everyone. Unless you can spare minimum four hours per week, stock investing may not give the best returns.
Q4: Which is more Liquid?
Liquidity means how quickly you can sell and get your invested money back.
Stocks are more liquid.
Stocks have higher liquidity. You can exit a stock by selling it in a matter of seconds during trading hours (9am — 3:30pm). Once sold, you can withdraw your funds instantly from the broker account to your bank account.
Mutual funds are not liquid. Once you exit a mutual fund, it takes 3–5 working days to get funds back to your bank account. Also, if you have been invested in a mutual fund for less than a year, you have to pay a penalty fees known as exit load.
So, overall, stocks have higher liquidity than mutual funds.
Parting Thoughts
There is no best mode of investing. There is just a more suitable mode of investing as per your goals, time, and financial knowledge. Financial knowledge can be gained over time, time can be made by better organisation.
For most of the working folks out there, mutual funds (MF) work just fine. MF double your money every 5–6 years in the Indian equity market. If you have time, capital to invest, and sound finance knowledge, stock investing can double your money every 3–4 years, if done right.
I, do both. I personally invest in stocks picked by me. I also invest via four mutual fund schemes, one ELSS, one Smallcap fund, one MidCap fund, and one Thematic fund. As I get more comfortable picking stocks myself, I might divert higher portion of my investment via stock investing.
What has worked well for you, stock investing or mutual funds? Share in the comments below.
Happy Investing!
Disclaimer: This is not investment recommendation. Do consider subscribing to my email newsletter here, where I send subscriber only info on Indian stock market weekly.
