Investment in Equities whether directly or through mutual fund route has out-performed other investment asset classes over the long-term in India as well as globally. With development in technology, ease of transacting & enhancement in transparency of financial products , more & more investors are increasing their portfolio with this asset class. Retail Investors in India have started to realise the value addition made by this asset class over past so many years, that’s the reason long term investor are ready to take the short-term volatility of this asset class positively. As they understand the short term downfall in prices is a good opportunity to invest more rather than being panic. Better regulatory environment and improved corporate governance have also helped bring more investors to Equities.
Currently, retail equity investment in India is mostly channeled directly in stocks. Individual investors hold around 20% of the total equity market value, while mutual funds account for about 3%. This is almost the opposite of global trends where retail money is mostly professionally managed and mutual funds are the investment vehicle of choice for equities.
Reasons for Choosing Mutual Funds Over Direct Investment Into Stocks
Diversification – When you invest in a single stock or bunch of stocks (3-5 scrips), the change in it’s value is very high. On a given day it can be extremely volatile. It can give you 20% return and sometimes -10% loss also depending on the environment. Mutual fund on the other hand is not that much volatile by nature, as the diversification is very large and at a time 30+ stocks are covered. Different kinds of stocks from different sectors and market capitalization are involved in mutual fund and the over all change in value is thus less volatile (other than extreme days).
Professional Management – Stock investing is a personal affair and you are doing it on your own the decision of what to sell and what to buy is on you. Even in case of long-term investing, you might have to keep an eye every quarter or yearly unless you have really spent some good time in picking the good stock. You need to also keep an eye on news and sector specific developments. Monitoring in mutual funds is relatively low because the job of monitoring is anyways done by the fund manager who is paid SALARY to filter through the fluctuations. He constantly adds and removes the stocks from the portfolio. This can be a positive point, but sometimes it can be a negative point also if there is too much of churning.
Return Potential & Consistency – This is very much in line with the above point but still let’s look at it separately. There are lot of success stories where someone got quick rich by investing in equities directly and it can happen, but those are rare happenings and require lot of work and analysis, patience and belief in what you have picked. If you want superb returns in short time and you believe you can research well, you can go for stock investing directly but then risk is also more.Mutual funds are known to deliver good returns (not in line with stocks, but still very good). So you can expect handsome returns from mutual funds but not unbelievable like stocks return. This is mainly because the money is diversified across different stocks (read ideas) and chances of all of them becoming a super success in short time is impossible.
Systematic Monthly Investment – Mutual funds are known for possibility of SIP (monthly investment). SIP in mutual fund works and is recommended as a great way for a salaried person to invest in equity markets for long-term basis without understanding the working of equity markets.However SIP in stocks do not work. Yes, some companies provide you the facility of SIP in stocks, but it’s a terrible concept. There is no diversification and SIP in a particular stock does not make sense because the risk is with single stock. A stock can be in a bad phase for years and decades, whereas in a mutual fund the bad performing stock is weeded out.
Asset Class Restriction – Stocks investing is restricted to Stocks only. You can choose a large cap stock, mid cap stock or small cap stock, but finally it will be equity asset class.Mutual funds can invest in mix of asset classes. There are equity funds, debt funds, gold funds, Mix of Equity and debt also. To top up, even balanced funds are there which can adjust the asset allocation on its own, so in a way mutual funds are more superior in terms of features compared to a single or bunch or stocks.
Convenience – The convenience of mutual funds is undeniable and is surely one of the main reasons investors choose them to provide the equity portion of their portfolio, rather than buying individual shares themselves. Determining a portfolio’s asset allocation, researching individual stocks to find companies well positioned for growth as well as keeping an eye on the markets is all very time consuming. People devote entire careers to the stock market, and many still end up losing on their investments. Though investing in a mutual fund is certainly no guarantee that your investments will increase in value over time, it’s a way to avoid some of the complicated decision-making involved in investing in stocks. Many mutual funds like a sector fund offer investors the chance to buy into a specific industry, or buy stocks with a specific growth strategy such as aggressive growth fund, or value investing in a value fund. People find that buying a few shares of a mutual fund that meets their basic investment criteria easier than finding out what the companies the fund invests in actually do, and if they are good quality investments. They’d prefer to leave the research and decision-making up to someone else.
Lower Costs – The trading costs of buying and selling stocks are often prohibitively high for individual investors. So high-priced in fact, that gains made from the stock’s price appreciation can easily be canceled out by the costs of completing a single sale of an investor’s shares of a given company. With a mutual fund, the cost of trades are spread over all investors in the fund, thereby lowering the cost per individual. Many brokerage firms make their money off of these trading costs, and the brokers working for them are encouraged to trade their clients’ shares on a regular basis. Though the advice given by a broker may help clients make wise investment decisions, many investors find that the financial benefit of having a broker just doesn’t justify the costs.
Historical Comparison of Equity MFs Vs Direct Investment in Stocks
A study to compare the historical performance of Indian equity funds to that of the stock market over the last 10 years. We chose 25 equity mutual funds based on size (highest assets under management) to represent the entire equity mutual fund industry in each year. We compared the median yearly return for these funds to the yearly returns of the Nifty. Here’s what we found:
The analysis shows that
- Equities in general created wealth for investors over 10 years
- The return provided by both mutual funds and the market varied significantly from year to year
- In each year, there were significant differences in returns between the two
- Equity mutual funds outperformed the Nifty in 7 of the 10 years
- The cumulative annualised return of Equity mutual funds over 10 years was significantly higher than the Nifty.
My Take :
Equity mutual funds in India have been relatively consistent in outperforming the broader stock market. Stock selection requires expertise & hence should be dealt by experts like Fund Managers in Mutual Fund, you can invest n stocks directly provided you posses or learn that expertise.It takes less effort, less time, less experience and less specialised knowledge to get good returns from equity mutual funds than it does from directly trading in equities.