Direct Equity Investing vs Investing in Mutual Funds

<h4>Investing</h4>

Transactions are done through Broker or other intermediaries.

Transactions can be done directly through fund houses or stock exchanges.

<h4>Mode of holding</h4>

Investment in equity shares must be held mandatorily in demat accounts.

Mutual fund units can be held either in physically in the form of units or demat account.

<h4>Investment Control</h4>

The investor is in direct control to make investment decisions, including which stocks to invest in or which stocks to sell.

The investor is not in control of investment decisions and is entrusted to professional fund manager/s.

<h4>Research</h4>

Direct equity investing requires intensive research by the investor, as identifying and investing in equity stocks of the companies with high growth potential is not easy.

Mutual funds render professional fund management to the invested money, thereby eliminating the need for personal equity research to invest in stocks and instead delegating the investment decisions to professional fund managers.

<h4>Diversification</h4>

When one is investing in direct equities, the diversification of the investment portfolio must be taken care of by the investor by suitably investing in a basket of stocks across the sectors. The concentration risk would be immense if the portfolio is skewed to handful of stocks.

Mutual funds create an investment portfolio comprising a basket of securities and assigning appropriate weights, thereby mitigating the concentration risk. The portfolio investing across the sectors would also benefit from diversification.

<h4>Asset Allocation</h4>

If investors are looking for asset allocation with investments across different asset classes, direct equity investing might only help manage the equity allocation. The investor may be required to explore investment opportunities in debt and other asset classes to allocate towards such asset classes.

Mutual funds provide a wide range of mutual fund schemes for investment, wherein the investors can choose to invest in equity funds, debt funds, hybrid funds, solution-oriented funds and other schemes. As such, investing across different mutual fund schemes can help effortlessly take care of asset allocation.

<h4>Real-time Investing</h4>

One can invest in equity shares on a real-time basis during market trading hours, and the price prevailing at that time is applicable for that transaction.

The transactions in mutual funds are processed daily with day-end NAV (Net Asset Value) applied to all the transactions received before the specified cut-off time. However, investors get real-time NAV when invests in Exchange Traded Funds of Mutual Funds

<h4>Tax Benefits</h4>

No tax benefit is allowed for investing in any equity share.

Investors can avail tax rebate under Section 80C of the Income Tax Act by investing in Equity Linked Savings Schemes (ELSS funds). Such deduction is available equal to the amount invested in ELSS, subject to an overall ceiling of Rs. 1.50 lakh in a year.

<h4>Investment Expenses</h4>

There are no recurring expenses for investing in equity shares, except for transaction cost involved at the time buying or selling of securities and annual maintenance charges for the demat account.

The returns from the mutual fund scheme are subject to the Total Expense Ratio of the scheme, which includes expenses towards fund management, transaction expenses, brokerage, commission, and other operating expenses. Such TER is regulated under SEBI guidelines.

<h4>Transaction Expenses</h4>

When buying or selling equity shares, the transaction expenses include DP member brokerage, exchange fees, etc.

There are no transaction costs at the time of investing, except for minimal 0.005% stamp duty. Further, at the time of redemption, mutual fund investments may be subject to exit load if the mutual fund units are redeemed before the  specified exit load period.