Equity Mutual Funds vs. Stock Market Investment

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Two investment products might look similar in nature but are completely different from each other. Both the avenues have its merit and demerits and are two side of one coin. Many investors invest in both the products with a view that both would behave similarly and would give similar returns. The concept of investment in mutual funds is more recent than stock market. Mutual fund investment is understood and accepted as means of investment in the recent Bull Run 2014-2019 which has matured investors of remaining invested in MFs for a long period. “Mutual fund Sahi Hai” campaign of AMFI, the MF association, has taught to great extent the importance of SIPs and many have handled well their behaviour inspite of the recent pandemic crash in end of March. However, the concept has to be nurtured more especially with recent V shape recovery witnessed by all of us in stock market and has shocked many who thought that this is end of the world with virus breakdown. Investment in stocks market has been at its record high which gets proved 24 lakh new demat accounts opened during lockdown. Many are making robust money in this Bull Run which indeed is one of the steepest rise in history but on the other hand investors want to book profits from MFs defying the essence of goal planning investment. Thus it is important to understand three aspects which make Stock Market investment different from Equity Mutual Funds..

Diversification is the key for MFs

Any MF will diversify its investments among different sectors and within each sector investment is made in many companies to minimise the risk of dependence on few stocks. In stock investment one bets on few stocks, may be 5-10 stocks which may give them a windfall return especially in today’s scenario which has witnessed around 70% increase from its bottom in a span of 8 months annualising to 105% p.a. return. It is similar situation where a speed boat would certainly sail faster than a ship but in a storm the ship will sail itself through better than a speed boat. This means that when the rough times come 2-3 stocks out of 10 stocks can take away all the gains and bring you in losses. However, MFs with its diversification can handle the storm in a better way to prove its worth in long run. The stocks which can multiply many folds also carry a risk of crashing with any negative news however, with MFs diversification can save not only the principal amount but can generate returns over period of time.

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Mutual Funds are backed by team of Professionals

MFs are managed by the Fund Managers who have a team of professionals whereas Stock investments might be based on limited means of study. The stock picking is normally based on the “Tips” or some research based on the media coverages or internal news through your circle. MFs are backed by some reputed groups having big team in fund management to keep track of micro and macro-economic parameter both domestic and international. In MFs stock picking is after a thorough study about the company, promoters, product and many other factors which are analysed before investing. A regular monitoring is being done to study their results, their market share and any other factor which may be able to affect the performance of the company.

Mutual Funds have a variety of Schemes

MFs have different schemes that give the option to the investor to invest among all market cap- Large, Mid, and Small either in one scheme or separate allocated scheme. Moreover, it has a theme-based investment style possible i.e. one can invest in specific sector-based stocks should one feel bullish on any sector. Many other options are available to mitigate the risk wherein hybrid scheme the component of debt is added to balance the portfolio. In stock Investment, it is based on the study of particular stock which may be in sector-specific and/or any market cap suiting the investor. The investment made in stock might perform better than your expectation as we are witnessing in the current markets scenario but it is important to book profit at the right time. In most of the situation, we need to time the market to buy and sell at the right time. This is not typically required in MFs investment where one should be clear of its investment objectives so as you don’t require to time the market rather you should time your financial goal.

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The investment philosophy always directs you to not put all eggs in one basket; similarly one should look at to diversify the investment in Physical assets, Debt, equity and others. In equity one can further diversify between MFs and stocks based on the resources in form of time and knowledge one has.