Most investors know the importance of investing in equity for higher returns and long-term wealth appreciation to achieve various financial goals. However, considering the higher risk involved with the equity asset class, many investors hesitate to invest. If you are a first-time investor in equity, it is quite common to have a question in mind about whether to invest in equity funds or in stocks/direct equity. Generally, it is difficult to say which is better – equity funds or stocks? Both the investment avenues have some unique benefits and drawbacks. Depending on your unique requirement, suitability may vary. Let’s compare both options so that you choose the best suitable investment option for you.
Understanding the basics – Equity funds and Stock
Equity funds are the type of mutual funds that invest the majority of the investor’s corpus into the portfolio of stocks. There are various types of equity mutual funds available for investment such as large-cap mutual funds, small-cap funds, mid-cap funds, thematic funds, sectoral funds, equity-linked savings schemes (ELSS), etc. Each fund type is designed for a different set of investors with varying risk and investment needs. On the other hand, investing in stocks is a direct investment into a share of a company or taking part in the ownership of a business. Investing in stocks requires you to do intensive research and it involves relatively greater risk than equity funds as funds are managed by professionals and experts. Now, let’s take a comparative look at both these investment options based on various parameters to help you make an informed choice.
|Professional management||Equity mutual funds offer you the benefit of professional management. The fund management team does extensive research on the stocks to be included in the fund’s portfolio, sectors, and the overall economy. The fund manager constantly monitors the performance of the fund and works on risk management. For example, a large-cap mutual funds portfolio is constituted by a thorough study of large-cap stocks and economic scenarios.||While investing in stock, you need to spend a considerable amount of time on market research to pick the right stocks for you. Even with expert advice, managing risk you need to put in a lot of effort to understand the market scenarios and analysis.|
|Diversification||As mutual funds pool the money from various investors and invest them in stocks of 30-50 various companies, the concentration risk in the investment is reduced to provide the benefit of diversification. Mainly, equity funds offer diversification for your investment that is as small as INR 500.||When you constitute a stock portfolio, you may invest in 12 to 15 stocks for diversification. However, to diversify you need to invest in a larger amount.|
|Cost||Equity mutual funds are cost-efficient options as most of the funds come with an expense ratio that is relatively lower, which will have an impact on end returns.||Investing in direct equity involves a variety of expenses and charges such as brokerage, GST, STT, etc.|
|Diverse options||There are mutual funds for every type of investor. There are a wide variety of equity funds available for investors such as large-cap mutual funds, multi-cap funds, mid-cap funds, ELSS, international funds, ETFs, etc. which you can choose based on your investing style, risk profile, and investment needs.||Though there are thousands of stocks available to buy from various sectors and industries, you need to choose the best 10-12 among them to build your diversified equity portfolio. You will not have a customized option to choose from.|
|Risk and return||Equity funds also carry risk. However, the risk may vary from moderate to high depending on the funds you choose. Equity funds have the potential to deliver higher risk-adjusted returns over the long run.||Stocks carry greater risk and greater potential to gain/loss on it.|
|Flexibility||Mutual funds allow you to invest a lump sum and as well a small amount in a disciplined manner through SIPs.||Stocks require you to invest in lumpsum.|
Additionally, investing in ELSS equity funds can help you save tax under Section 80C of the IT Act. If you are a first-time investor looking to save small amounts every month, equity funds can be a better option than stocks. Both the options have pros and cons. It is important to choose the investment option based on your unique need, financial goal, and risk profile.