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Equity mutual funds or stocks: What is right for you? MintGenie explains


One of the most famous cricket commentators Harsha Bhogle recently said… “This is young India at work. Give them a step and move out. Our generation thinks: don’t lose. This one has a different life. They see victory, ” Although what he said was in the context of the Indian cricket team’s impressive test victory over the Australian team, this change in the mindset and attitude of young Indians seems to reflect in many areas of life, and investment is no exception.

The recent growth in the number of young Indians investing in stocks and mutual funds This is evidence of this change in attitude towards investment. Another interesting characteristic of these young people is their hunger and openness to learn about it invest. Having interacted with many young investors over the years, a common question they ask is….. Should I stick to investing in equity mutual funds or should I also invest directly in stocks?

Although there is no direct answer to this question, here is an attempt to put this “equity mutual funds or stocks?” debate in the right perspective, especially keeping in mind the changing mindset and mindset of young Indians.

First of all, there is no doubt that equity mutual funds are one of the best investment products for retail investors given the various advantages they offer – diversification, professional fund management, strong regulatory framework, low cost, affordability, transparency, convenience and so on. . The strong regulatory framework and some of the other characteristics of mutual funds mentioned above go a long way in protecting the interests of investors.

However, they also come with certain investment restrictions. Hence, most equity mutual funds may not be able to achieve massive outperformance relative to their respective benchmarks. In fact, from a long-term perspective, even 100-200 basis points of outperformance vis-a-vis a benchmark can be considered quite good for an actively managed equity fund.

On the other hand, direct stock investors have no such investment restrictions and can build their personalized stock portfolio to suit their own risk appetite. So does that mean you prefer straight stocks to equity mutual funds? Well, before we answer this question, let’s look at the kind of flexibility that direct stock investment offers vis-a-vis mutual funds.

Ability to own a concentrated portfolio of stocks: When you invest directly in stocks, you can own a highly concentrated portfolio of, say, 5 or 10 stocks, and allocate 20% or 30% of your portfolio to one stock. In contrast, a mutual fund scheme’s exposure to a single stock cannot exceed 10%. Even if stock weighting exceeds 10% due to price appreciation, a fund manager must exit some of the current holdings to return the allocation below 10%, which may result in a loss of opportunity if the stock price keeps changing. go up

Ability to invest in niche investment themes: If you are a focused stock investor, you can build a stock portfolio based on a number of niche investment theme(s) that you expect to perform from a short to medium term perspective. Although mutual funds offer thematic schemes, it is difficult for them to offer schemes based on niche themes that have limited stocks to invest in or are not attractive enough from a relatively long-term perspective.

Ability to invest in small cap or micro cap stocks without any restrictions: As a direct stock investor, you can easily make your desired allocation to small cap or micro cap stocks, due to smaller ticket investment size. In the case of mutual fund schemes with large assets under management, it is often difficult to take reasonable exposure to smaller companies due to (a) liquidity constraints and (b) regulatory constraints that limit the combined investment of a mutual fund under all its schemes under 10 years. % of the paid up capital of any company.

While these all seem like great benefits of direct stock investing, it’s important to note that with such flexibility comes a significant increase in portfolio risk. Therefore, if you have the necessary risk appetite and curiosity to invest in stocks, you might consider allocating a small percentage of your portfolio to targeted stocks first, complemented by a long-term core allocation to investment products others such as equity mutual funds. . And over time, you could decide on an appropriate allocation to straight stocks depending on your experience, risk comfort and success in achieving the desired results.

However, it is important not to invest in stocks based on some arbitrary tips or news and instead do thorough research to select stocks and build your stock portfolio. And if you want to invest in direct stocks but this process is too complicated or you don’t have enough time to do such research, you could also consider taking advantage of services SEBI registered investment professionals.

Nilesh Naik, Head of Investment Products, Share.Market (PhonePe Wealth)

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Updated: 16 November 2023, 11:31 AM IST

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