New-age and millennial investors prefer investing in equities directly as they can track the movements of their top stock picks and attribute the investment performance to themselves. Further, the intra-day price movements in share prices create further excitement for some investors. However, direct equity investing may be complex since it requires a lot of research and adequate knowledge of stock markets in general.
In contrast, investors may choose to invest in mutual funds, wherein the money invested by different investors is pooled together to create an investment portfolio. The investment decisions are made by professional fund managers backed by research analysts.
Mutual funds are emerging as a preferred investment option due to the wide range of schemes available for investors. One can choose scheme/s among bouquet of products across the categories and aim to achieve their financial goals considering their investment horizon, and risk appetite.
<h2> Here is a comparison of both the investment options on different parameters: </h2>
<h3>Particulars</h3> |
<h3>Direct Equity</h3> |
<h3>Mutual Funds</h3> |
<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. |
Equity investing may be considered by the investors who understand the intricacies of financial markets and can devote sufficient time towards research and analysis for equities. However, mutual fund investing can help the investors to benefit from the expertise of specialists in the field, i.e., professional fund managers.
Mutual funds provide professional expertise for the invested amount at lower costs. Further, whatever mode of investing, investors may have chosen, whether equities or mutual funds, it is crucial to regularly review the investment portfolio and ensure that your investments are not derailed from the set objectives. Such periodic review helps in maintaining the portfolio healthy.
Note: The tax provisions mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2022 presented in the Parliament in February 2022.
Tax disclaimer -
Equity Linked Savings Scheme (ELSS) is an open-ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit. Minimum investment in equity & equity related instruments - 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance). As per the present tax laws, eligible investors (Individual/HUF) are entitled to deduction from their gross total income, of the amount invested in equity linked saving scheme (ELSS) upto Rs. 1,50,000/- (along with other prescribed investments) under Section 80C of the Income Tax Act, 1961. Subject to prevailing tax laws.