Warren Buffet, George Soros, Prem Bhatia and Rakesh Jhunjhunwala are living legends of the stock markets. There is hardly any investor alive who does not dream of creating wealth by investing in the stock market. But, the conundrum that every investor faces is “Should I invest in mutual funds or stocks?”
Time
The first consideration to be weighed up is time. As an investor, do you have the time to study the stock market movements and indices? After making your investments, will you have the time to track the performance of your investments? Remember that it takes time to purchase and sell shares. Otherwise, you may be better off, making a contribution to a mutual fund scheme. Your money will form a part of the pool that is available to the fund manager whose only responsibility is to manage the funds so that investors earn dividends or enjoy growth.
Expertise
The average investor, and more particularly, first time investors, lack the expertise to analyse financial data and results, assess the impact of interest rate and foreign exchange movements, etc. on stock markets. They may, thus, not be equipped to manage direct investments in the stock markets. Fund managers are academically qualified and trained professionals in the sphere of stock market investments. They, therefore, bring a wealth of knowledge and experience to the table and are better positioned to devise and implement winning strategies for the benefit of mutual fund investors.
Financial Resources
Mitigation of downside risk is an important aspect of investing in the stock market. Diversification of portfolio is the key to minimizing risk. However, the average individual investor usually does not have an adequate investible surplus to invest in sufficient number of financial instruments and stocks across industries, sectors, and companies to build protection against a slide in sectoral or industry-specific stocks. Mutual funds generally manage pools of funds running into hundreds or even thousands of crores. With this corpus, the fund manager is in a position to invest in an array of financial instruments, markets and stocks. Portfolios are spread across the money market, debt market, equity market, large cap/mid cap and small cap stocks.
Control of portfolio
When you invest directly in the stock market, you have greater control over your portfolio. If a particular stock is not performing well, you can immediately sell the stock and purchase another, from which you may earn better rewards. When you invest in a mutual fund, the portfolio is managed by the fund manager. The only control you have is to exit from the scheme and switch to another scheme with the same or another fund house.
Returns
A comparison of the historical performance of equity mutual funds with the broader movements in the stock market reveal that the mutual funds generally outperform the stock market indices such as the SENSEX, NIFTY 50, S&P 500 BSE, and the sectoral indices. In the 10 years period from 2004 to 2013, the cumulative returns from equity mutual funds beat the cumulative returns from NIFTY by handsome margins in every year. The compounded annualized growth rate (CAGR) of equity funds was 16% as compared to 12.90% from NIFTY.
