Advantages of mutual funds over investing in direct equity shares
Below are the advantages of MF over direct investment in Equity.
- First advantage is diversification with comparatively very less money. For example even with just Rs. 500 we can buy shares of around 20-25 companies through MFs. Generally none of individual company is more than 5% of the portfolio. That means even if the fund manager has made couple of mistakes, the impact is under control. Since individually buying multiple company shares needs large amount of money, MFs win.
- Cost of research: According to me this is one of the most underestimated. Cost is both in terms of time and money. It requires years of experience to identify the right stocks. You need to really study seriously which requires real interest and right sources. If you want to buy research, costs are significant, (ex: cost of membership in gurufocus is $399 per year). Even after buying research you need to analyse before deciding. I have seen many people depend on tips. Very risky thing to do. Sometimes it surprises me to hear, “My friend completed- MBA finance and he advises me which company to buy”. After completing both MBA and CFA I know how little we study in MBA finance in stock picking. Actually in bull market making money is easy. But in bear market losing less money is very difficult. We underestimate Mr. Market. Again, this is purely my experience and not meant to hurt really good stock pickers.
- Tax treatment: No difference. Because after 1 year no tax in Equity or equity MF. But probability of we selling individual stocks within one year is very high thus generally incurring tax disadvantage (reasons are mainly psychological or lack of discipline).
- You can buy a good MF and sleep comfortably for a year. But for selected stock you need to be alert on both sectoral impact and individual company news.
- Costs: Equity scores here because apart from brokerage and years maintenance of demat account there are no other charges. Whereas MFs have up to 1.5-3% yearly charges that goes to fund management and other expenses. But since there no entry or exit load and no need to have demat account to buy MFs, partially lowers the cost and competes with buying direct equity.
My suggestion is enter the market with MFs. Spend at least couple of years to understand market dynamics and then gradually enter equity directly. It requires both study and discipline.
Market is not for Fun. It is a serious stuff. We can’t underestimate Mr. Market. He has plenty of tricks to prove us wrong.