The intent of all investors is the same – to get the best out of their hard-earned money. The investment landscape has widened considerably and offers a lot of options. Two of these investment avenues are mutual funds and equities. Both of them are highly liquid and at the same time are considered good from a long-term investment horizon.
What is Equity Investment?
In equity investments, the investors put their money in the stocks and equity derivatives of entities. The following are the equity investment options currently available to Indian investors.
- Shares
Shares or stocks are units of the company’s capital. Shareholders get a certain percentage of the ownership rights of the company. Shares are traded on stock markets such as NSE and BSE.
- Futures and Options
Future and Options contracts permit the investor to trade (buy /sell) the underlying stock at the current prevailing price but postpone the execution to a predetermined date in future. The performance of this equity investment depends on the underlying equity.
- Arbitrage Schemes
Arbitrage schemes simultaneously invest in equity and derivative market so as to ensure that the investor earns a profit irrespective of the market movements.
What is Mutual Fund Investment?
Mutual Funds pool in money from multiple investors and then invest the corpus across various asset categories. It enables the investor to invest small amounts of money on a regular basis (Systematic Investment Plan or SIP). One can also opt for Systematic Transfer Plan (STP) and transfer money from one fund to another. There are multiple types of mutual funds:
- Equity Funds
These mutual funds invest their corpus in equity stock (shares) of companies.
- Debt Funds
Funds which invest in government bonds, fixed income assets or debentures fall in this category. They are considered a safer alternative due to the stability of returns.
- Balanced Funds
These funds invest in multiple asset categories. The proportion of debt or equity varies basis the scheme’s objective
Equity Vs. Mutual Funds
- Risk
There is a certain degree of risk involved in every investment. However, the level of risk varies. When compared to direct equity, Mutual Funds are considered to be a safer alternative. It is due to the fact that mutual funds spread the risk through diversification across stocks or asset categories. Fund managers make the investment decisions within an institutional framework that requires adherence to certain ground rules of sound investing. Usually fund houses have a certain set of rules in place to safeguard the client’s corpus such as the stocks should be spread across multiple sectors or industries, a certain portion of the portfolio should be invested in large companies due to their stability, etc.
The equity markets are prone to volatility and fluctuations. However, it is important to note that the risk quotient is always relative. And a successful investment is about managing risk and not completely avoiding it.
- Return
Risk and return are directly related to each other. Hence, the higher the risk, higher is the return. As equity investments have a high-risk quotient, they have the potential to give higher returns as well.
- Market Knowledge
In order to invest in mutual funds, one does not need to be a financial expert or have a deep understanding of the markets. Prospective investors can share their financial goals and their risk appetite with the fund house and they, in turn, can suggest the best-suited scheme for them.
However, the case is different from equity investments. The foundation of successful equity investing is having a comprehensive understanding of the stock market, complete awareness of the recent market trends and above all having the capability in terms of information, research and analysis to execute that.
- Portfolio Management
In case of Mutual Funds, a team of professionals and experts manage the portfolio on behalf of the investors. Hence, from an investor’s perspective, it is a case of passive investment.
However, indirect equity investment, it is the investor who needs to actively manage the portfolio.
- Cost of Investment
The cost of investment is a by-product of the style of portfolio management. In Mutual Funds, since the funds are managed by professional fund managers, there is an additional cost (professional fees) involved. Additionally, there are other charges associated with mutual funds such as transaction charges, exit load and recurring expenses.
There are numerous costs that investors need to bear while purchasing or selling shares. Some of them are stamp duty, brokerage charges, securities transaction tax, SEBI Turnover charges, depository participant charges, etc.
- Convenience
Mutual funds are passively managed by investors as there are dedicated fund managers to track and monitor their performance. Hence, it scores higher on the convenience parameter. On the other hand, equity investments require constant monitoring on part of the investor. Hence, it requires more time and effort on part of the investor.
Investors in equity rely on their own expertise and knowledge of the market while investors in mutual funds can depend on the expertise of the fund manager to guide them.
- Exit charges
Fund houses levy a charge called “Exit Load” if mutual fund investors exit the scheme before the completion of the lock-in period. The main objective behind this charge is to encourage investors to stay invested and dissuade them from making early withdrawals.
Equity investments have no such inherent charges. Investors can sell their shares whenever they desire.
- Demat Account
In order to start investing in equities, one needs to hold a trading account as well as demat account. The trading account enables the investors to conduct the trades (buy/sell) and Demat account is the safe place where the shares purchased are deposited.
However, if an investor wants to buy mutual fund units, he/she can do so even without holding a demat account. One can either directly purchase it from the fund house (by visiting their office or from their website) or seek the help of intermediaries such as Registrar and Transfer Agents (R&T Agents), distributors or advisors.
- Tax deduction
As per Section 80C of the Income Tax Act, investors can save tax by investing (up to Rs 1,50,000) in ELSS (Equity Linked Saving Scheme) mutual funds. LTCG (above Rs. 1 Lakh) is taxed at 10%. Tax rate of 15% is applicable for Short term capital gains Switching between mutual funds also attracts similar tax liability as it amounts to selling the current fund.
What should you opt for?
Equity investments can be highly rewarding for people who have in-depth knowledge of the stock markets and possess a high-risk appetite. Also, more importantly, regular tracking of the stock markets consumes a lot of time. More often than not, individuals or retail investors do not have the expertise or the time to educate themselves about the nuances of the stock market.
Hence, investing in mutual funds is, therefore, a more suitable route for retail investors who do not have such specialized knowledge or experience. Through this investment avenue, one can also benefit from professional fund management services to get the most of their hard-earned money.
In a nutshell, there is no right or wrong investment option. Similarly, there is nothing called the best investment avenue. One needs to decide what is the most suitable investment tool for them after considering all the above-mentioned factors.
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