Equity mutual funds invest in stocks, something I can also do through a stock broker. How is it different then?

The prime objective of every investment made is to create wealth. Though lucrative, creating wealth isn’t an easy task. It requires knowledge, skills, time and some amount of risk taking. Investors always want their investment to be profitable and no one desires losses. Not all investors are financially sound or have an inclination or the required time to be up to date to the market happenings; this paves way for entities which facilitate the investment route for investor by rendering advice and ease of transaction. Stock Brokers and Mutual Funds are such entities and investors often are faced with a choice whether to invest in the Indian Equity markets directly; by investing in stocks through a recognized stock broker or take an indirect route via Mutual funds.

Direct exposure to stocks is feasible for those savvy investors who understand the nitty-gritty of stock markets. Here, investors need to analyze and choose the equity shares to invest in. However this is easier said than done. Choosing a good equity share requires broad understanding of the economy, sectors and the companies in the investment universe. Before investing, one has to go through the financials of the company like balance sheet, profit & loss statement as well as all other parameters that indicate the health of the enterprise. Moreover, investors should also possess other skill sets like analyzing the past trends and project the future earnings too. Their investment decision hence becomes dependent after taking a holistic picture. Overall, to be successful, the investors are hence expected to be great stock pickers. However, not all the investors have the knowledge and the required time to research about various companies, sectors or overall trend of markets. Hence, an indirect approach i.e. investing through mutual funds becomes a preferred medium to take exposure to equities. Let’s look at parameters which make investing in equity mutual funds far more beneficial than direct investment in equities:

Professional management: Mutual funds are managed by skilled and experienced professionals who not only understand the markets but also track them regularly. These experts analyze company’s performance & prospects before selecting suitable investments to achieve the investment objective. In any given environment, they try to find out the best companies to invest in based on their extensive research. A professional fund manager ensures that the portfolio holds quality stocks with potential for long-term returns.

Diversification: In case of direct investment, an investor might have bias towards a particular stock or a sector; based on which one may have excess exposure in that stock. Other individual might not have sufficient funds or mental bandwidth for a diversified portfolio. Mutual fund invests across companies and sectors thus reducing the overall risk of the portfolio by means of diversification. Additionally, there are sectoral limits and individual stock exposure limit in place which helps in spreading the risk and reducing concentration.

Variety of funds: Mutual fund offers various categories of funds catering to different investment need of an investor. There are sectoral funds and thematic funds, there are also funds based on market capitalization namely large cap funds, mid & small cap funds, diversified fund etc. Based on the risk appetite and the investment need one can choose the type of fund to invest in. For eg: An aggressive investor can look at sectoral or thematic equity fund while a moderately aggressive investor can look at diversified fund or a multi-cap fund.

Though direct investing might excite many investors; the risks associated with it are equally high. Stock market investing is a serious business and requires significant amount of time and resources in order to be successful. If an investor is well versed with the nuances of investing and has the time to devote for investing, one can opt for direct investing via a stock broker. Investors who are looking for hassle free, cost effective and an efficient mode of investing in equity markets may invest via Mutual funds.