Why Opt for Mutual funds when you have Direct Equity Investments

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Let us find in this edition about direct equity and mutual Funds and which is better for whom and why.

Direct Equity vs Mutual Fund

Direct equity is where you open a DeMat account and start buying stocks and shares of the company which you think might grow and give you returns. You can personally pick stocks and customise your portfolio to the best of your knowledge.

Whereas in Mutual Funds an expert fund manager does this for you for a fee. They identify the right assets among debts, equity and others and choose a diversified portfolio that promises high returns and low risk. The asset is bought by pooling all the money from investors and returns are generated and distributed according to their invested proportions.

A mutual fund is basically like hiring a financial expert to buy you assets. Therefore, if you are a novice in financial literacy and are just starting, mutual funds will save you time and money. But, then again you might be faced with a lot of questions in mutual funds which you will learn in the coming episodes.

Who can opt For Direct Equity?

Direct Equity Investments are apt for people who have knowledge of stock markets and how they function. You need to understand the underlying business and the sector the business belongs to. You have to analyse a company’s records. financial performance, management experience, and even external factors such as Government policy, foreign exchange rate, and political changes both domestically and internationally.

One also needs to rearrange and shuffle the portfolio time and again to manage the risk and reward ratio.

If you have knowledge of the stock market and have the discipline and understanding to handle profits and losses similarly, then direct equity is for you.

Also, you require the discipline to reshuffle your portfolio and invest some amount every month to keep growing your investments.

Ask yourself the following questions before deciding on direct equity.

Are you aware of the stock market and its functions?

You need to know how to diversify your portfolio, how to select stocks and figure out the fair value of that business. If you’re not aware of it then direct equity investment is not for you.

Do you have time to manage your portfolio?

Time factor; if you are investing in direct equity you also should be ready to invest your time. Monitoring and reallocating stocks and funds takes time, not just once but from time to time, to ensure that your funds are being utilised properly.

This is where Jay opted out of direct equity. He knew he couldn’t afford the time needed to manage his portfolio and constantly research and reallocate funds based on current market trends.

Do you have the Self Discipline?

In mutual funds, we either invest as Systematic Investment Plans ( a particular amount every month) or as a lump sum. This process can often be automated, but when on direct equity you have to actively make decisions and invest funds strictly every month. Also, know when to buy and sell stocks.

If the answer to all the above questions is yes, then you don’t have to spend extra on the fund manager and maintenance fee and start investing in direct equity with proper diversification.

If not, then a mutual fund is the best one for you.

Frankly start with mutual funds and as you gain experience and expertise, start investing in direct equity too. Jay’s friend has the skill and time so he trusted himself more than a fund manager, for people lacking these mutual funds are a better option. Mutual funds enable you to invest in a wider range of assets for the same price.

An Illustration To Help You Out

Suppose Jay and his friends collectively invest Rs. 5,000 in mutual funds, dividing it into units priced at Rs. 10 each. 4 friends invest 1000 each and 2 others invest 500 each. This allows everyone, including those with smaller investments, to participate. Their fund manager buys blue-chip stocks with this money. At the end of the month, the stocks increased in value to Rs. 5,250.

By pooling their money in mutual funds, they can benefit from collective investments, diversify their portfolio, and participate in blue-chip stocks even with smaller individual contributions. The fund manager charges a 1.5% fee from the increased value as his service charge. The profits are divided based on the percentage invested.

On the other hand, if each of them had separately invested in a blue-chip company (stock) which let us assume around Rs 900, then the 2 friends who contributed less couldn’t have even participated.