Should I invest in Mutual funds or Share market?

A lot of investors have become wise enough to understand that it makes sense to invest when the market is down. Most of the investors are willing to take advantage of the current economic downfall. But the biggest question is:

Should we invest in mutual funds or stocks?

Thanks to WhatsApp University, we keep getting forwards that argue how you would have been a crorepati by now had you invested only Rs. 10,000 in Infosys in the year 1993.

Such forwards are certainly fascinating. It prompts you to invest in a small company that can be the next big thing in the future and can swing your fortunes along with it for the better.

However, when we read such messages, what we forget is the challenges in selecting the next big company out of more than 5,000 stocks listed on the exchanges and the risk of losing money by betting on the wrong stocks.

We forget the stories of companies that turned out to be wealth destroyers.

This is why it is important to invest in a diversified portfolio and avoid concentrating your investments on a few stocks. And Mutual Fund is a good cost-effective and convenient investment vehicle to do it.

Here are a few points that tell you why Mutual Funds are a better option than stocks:

Broad Market Diversification

When you invest in a mutual fund scheme, the scheme based on its theme invests your money in several companies across industries and sectors. Not only that, Mutual Funds also invest across asset classes such as equity, debt, etc.

So, one of the top advantages of Mutual Funds is that they provide low-cost access to a diverse set of securities. Your chances of success are higher in the long-term with Mutual Funds because you don’t put all of your eggs into one basket. Just buying a handful of Mutual Funds can leave you with quite a diversified portfolio.

And this spreading out reduces risk as all asset classes/securities rarely fall at the same time.

Convenience Of Investing Small Amounts

Imagine you can invest Rs. 10,000 - Rs 15,000 every month. With this amount of money, you can barely invest in a handful of stocks directly. But with Mutual Funds, you can invest in the top 30 or top 50, or the top 500 companies of India. In fact, even if you have Rs. 500, you can invest in Mutual Funds and grab a share in all the top stocks listed on the exchanges.

Low cost of investing

Investing directly in stocks can be more expensive than Mutual Funds because you have to pay a brokerage fee for every transaction, which could be between 0.5-1% on the transaction amount. In addition, you also need a Demat account and need to pay Demat charges every year.

However, for zero commission direct plans of Mutual Funds, the mutual fund companies typically charge somewhere between 0.2-0.7% annually. This is a minuscule amount for the liquidity, ease of investment, and convenience they provide.

Professional Management

One of the biggest advantages of mutual funds is that professional experts are managing it. Each Mutual Fund scheme is helmed by a fund manager who has in-depth knowledge about the financial market and has years of experience in managing investment money.

In a mutual fund, the fund manager and his team continuously track various securities and economic variables and keep optimizing your fund portfolio as per the changing market condition. It ensures you get the best possible returns on your investments, without having to keep track of the best investment opportunities continuously.

Customization

There is a Mutual fund scheme available for every possible financial goal.

Whatever might be your investment goal, time-frame for investment or your risk appetite, you are sure to find a scheme that will suit your needs.

From high-risk, high-reward equity funds to low-risk debt funds that offer slower, steadier growth, as well as everything in between, mutual funds are perfect for your different investment objectives. This customization is not available with the stocks.

So, these are the list of reasons why Mutual Funds are safer and better as compared to Stocks. However, it is recommended that whatever route of investment you choose, you should take a look at regular intervals and assess whether your financial goals are being met with the investment you made or not.

I had a similar doubt regarding Stocks Versus Mutual Funds before I did my research last year. Please read this answer till the end and you will get your answer:

What if I tell you that there are high chances that around half of the companies in Nifty 50 would vanish in the next 10 years?

Some of them would even go bankrupt.

Shocked?

Not possible?

What if I tell you that this is what has happened in the last 10 years.

22 out of 50 companies in Nifty 50 in 2009 do not even exist in Nifty 50 in 2019.

Yes, you heard it right. 22 companies!!

What are these companies?

·         In 2009, did you imagine that Reliance Communication would go bankrupt?

·         Did you imagine that Suzlon would be such a big wealth destructor?

·         Who imagined Idea Cellular from one of the biggest corporate groups (Aditya Birla Group) in India to be on the verge of bankruptcy?

·         Did you know that PNB would face such a level of corruption in the next decade with the Nirav Modi incident?

By the way, I am only talking about the top 50 companies in India.

Do you know what happened to the next 50 companies?

36 companies were wiped out of the nifty next 50 lists. Only 14 companies survived in top 100.

What is my point?

Stock Market is very brutal. The stocks which look favorite today might be down by more than 90% in a few years. The recent case is of Jet Airways, Idea, Yes bank, HDFL.

Stock market is very dynamic. Some stocks would rise while some would fall. If you think that you can buy a stock and blindly hold it for 10 years, there are high chances that you might end up in loss.

As a retail investor, it is next to impossible to track each stock.

While everyone would talk about the multi-baggers, nobody really talks about multi-losers. There are high chances that you would have more losers than winners.

Having said this, I still think that the stock market is the most rewarding investment option in the long term. But, how to invest?

·         Mutual funds are professionally managed by a team of experts. They know the in and out of the market.

·         They also have high bargain power. What is bargain power? Let me explain. Suppose you want to buy fruits. If you go to a local retail vendor, you have to pay money. But if you buy the same fruit from a wholesale vendor, there are high chances that you get the fruit at a lower price. Why? Because wholesaler purchases in bulk. Likewise, mutual fund managers purchase in bulk. If you let them buy from your behalf, there are high chances that they purchase the stock at a lower price then what you might have ended up paying. A lot of stocks rise just because of bulk buying and then retail investors enter at higher levels.

·         These experts also know the right levels to enter and the right levels to exit.

·         Mutual fund team actively tracks each stock every single day. They track thousands of parameters which are practically impossible for a retail investor to track.

·         There are various categories in a mutual fund that caters to different risk profiles. You have an option to choose any category which suits your risk profile.

·         Mutual funds diversify the investment by buying many stocks in the portfolio. This reduces risk. Even if a company goes bankrupt, some other company would give great return and overall returns would be balanced.

·         You can opt for active as well as passive mutual funds. Passive mutual funds are also known as Index or ETF funds which replicate the index like Sensex or Nifty. Since index is dynamic, the index funds also dynamically update the portfolio.

While some might still argue that stocks are better, I would say that it is not only about getting multi-baggers in the portfolio. It is also about downside protection to avoid any company which might go bankrupt in the future. Hence, it is about managing the risk vs return which is perfectly done by mutual funds.

This is the motivation behind the idea of mutual fund:

Not everyone has enough money to invest in stocks

Not everyone has expertise to understand stocks and differentiate good from bad

Not everyone has time or the discipline to do regular performance analysis of your stocks

Not everyone can trade in all the stocks to diversify the risk.

“Risk is what’s left over after you think you’ve thought of everything."