1 – Knowledge Required
Most of us think that investment is all about buying some stocks watching a quick tip and then waiting for the stock to rise and become multibagger in a few days.
But experienced investors know that this is far from the truth. They know that it needs a significant amount of knowledge, dedication and expertise to study a company’s balance sheets and only then choose the right company to invest, for a steady future. And mistakes can be made by anyone even the experienced investors who have spent their career in studying how stocks behave still they make big mistakes.
So it is clear that stock investing is not a child’s play. It takes hard work and a lot of understanding to pick the correct stocks, at the right time that is suitable for you. However, you do not need such extensive knowledge when it comes to mutual funds investing.
Mutual funds as a product created just for those type of investors who can’t spend much time themselves or do not have an extensive understanding of the stock market investment. One can pick a "good" mutual fund on your own by using some necessary ratings and rules or consult a financial advisor like us who can do that for you.
#2 – No control of stocks chosen
When you invest in mutual funds, you do not have any control over which stocks the fund did buy and which shares are sold from time to time. That is controlled by the fund manager. You only buy in the mutual fund as a product and give your money to the professional. So you do not have any control over the stocks which are chosen by the fund manager.
However, when you do stock investing, you are yourself the fund manager, and you have complete control over it. So based on your research and study, gut feeling, logic, gossip, tips from tv, you are free to buy and sell as you wish.
Structure of Mutual funds
3 - Volatility & Return
Whenever you buy a mutual fund, you are in reality investing a huge portfolio that may contain different stocks which contain 30-100 companies.
Hence your profits or losses are dependent on a large number of stocks, so the potential risk is distributed among those 30-100 different stocks. Making Mutual funds much safer. However, in the same way, the returns to is the average of all the stocks that is selected.
With a direct stock, the number of shares will you buy will decide how volatile is the return from your portfolio. Generally, most of the direct equity investors bet on very few stocks, they often buy 5-10 stocks only, but in large stock size in the portfolio and any change up or down in market influences the overall portfolio return.
Most of the time investors are not decked to handle the very high gain or very high loss. If there is the huge return, investors often sell their stocks and want to lock in the profits and similarly if there is a steep decline, they want to sell it off and get out of the “precarious” game.
In both the cases, investors tend to feel the urge wait and watch from the sideline, rather than stay in the game. However, This is exactly opposite in cases of Mutual Funds where you will find investors who have a mutual fund for the last ten years.
4 – Automatic Investments (SIP)
When you spend on mutual funds, there is a convenient automatic way of investing called SIP (Systematic Investment Plan). This allows a fabulous way to automate your investing budget and create a practice of regular spending. This plan is perfect for an investor who wants to systematically spend a fixed amount at a given date each month.
However, when you buy stocks, you have to manually buy in each of the stock by analyzing reading and accessing every detail every day if you want to spend on them regularly. Which is incredibly difficult to execute diligently.
5 – 80C Benefits
Direct stock investing has no 80C tax benefits, however, if you invest in ELSS (tax saving mutual funds), you can get the taxation benefits.
This is one small key factor Mutual Funds have a clear edge over direct stocks.