Why Mutual Fund is better than Direct Stock?
On any discussion on financial matters, you will always see the arguments on Mutual Fund vs Direct Stock, be it at a lunch table or at a tea and/or sutta break. Neither side is wrong here, they both cater to the different set of people. It’s not easy to win the argument on any side.
Image Credits Karvy Value
Having been on both the sides of the argument myself, I have experienced pros and cons of the both sides. Both sides gave me some wonderful returns and some bitter lessons in terms of the losses.
Here are few of the advantages for Mutual Fund which gives it upper hand compared to the Direct Stock investment, as I understand them.
Leverage Industry Experience / Research
As an individual investor (read trader) I had to spend much of my professional time, for which I get paid on hourly basis, to track my stock and always in the lookout for the information to buy/sell stocks. There was always need to refresh the financial sites every few minutes in fear of missing out something important. I always found myself asking (read begging, at times) for tips for the new hot stock. But after jumping to another side of the table I seldom feel the fear of missing out. I still visit the financial sites, but now to learn the financial trends and news. I am assured that the Mutual Fund I have chosen has a team of the researchers who are well qualified to read and process the market indicators. I am sure most of the friends of mine from the Direct Stock side could not understand in such detail and even if they do by the time they read and understand it MF research team most likely have already taken actions to gain advantages of the situation. I am sure, I or for that matter, any regular salaried person could not beat them on the consistent basis.
I am repeating myself a little here, but as an individual, all we could do is scouring the financial sites to get information. Wherein MF Research team can easily get a seat at the table with company management to understand their strategy. Seldom the company management denies them because they can bring in so much money to their equity stock. I bet, none of us could pass the company reception desk if we want to get further information.
Low Transaction Cost
For the Direct Stock transactions, we have to pay many charges on both buy and sell sides. There are brokerage charges, services tax and much more. And, in addition to regular transaction charges, there is the annual fee to keep Demat account active. Wherein, for the Mutual Fund, all we pay is the annual expense charges which get deducted from NAV on the daily basis. No other hidden charges in the Mutual Fund.
Established Track Record
As an individual I always cherished when market gained the new highs and participated with buying more stocks and selling stocks when market tanked, I was doing exactly opposite to what the theory books says. Losses are booked and forgotten. Never I came with the annual returns my investment generated, it was always now or never situation. Very uncertain and unpredictable. Wherein in case of MF, we could check their history and understand how they behave in different market conditions. They become predictable and traceable.
As an individual, I always wanted to buy stock which has the potential to appreciate multifold. But there was that unwritten rule that the price of the stock has to be really low, say below 500. Anything above that amount is considered expensive irrespective of its potential for appreciation. Buying the industry leaders like Bajaj Auto, Maruti Suzuki, TCS, HDFC, Nestle India, Page Industry (Jockey brand India manufacturer) etc. never came to my shopping list because of such a biased view of mine. Wherein, MF has very deep pockets. They pick up stocks based on their potential irrespective of its price. I bet, you will see one of the stocks mentioned above in about all the Mutual Fund schemes but not in your the stock shopping list.
As an individual I always had some industry heavy portfolio. And, I always had inherent limitations on my investments, say few thousands or lacks. Building a diversified portfolio which includes stock from all industry sectors and keeping their balance was a relatively impossible for me. Simply, think about constructing a portfolio with more than 20 stocks without having more than 10℅ in any one stock. It’s certainly an expensive affair if not impossible. Wherein MF provides such diversification at relatively low expenses, as explained above, and that too on as low as 500 rupees investment. Hard to beat, isn’t it?
As an individual, I was always worried when I have had some money to invest. It brought lots of burden on me to find either new stock or evaluate any of the currently picked stocks if they are still worthy of further investment. As an excuse money stayed on the saving account and gets spent on impulse unnecessary things. Wherein, with the Mutual Fund, all I need to do is hand over money to them and let them take that burden of making investments. I am free to enjoy my life. Such a relief. This built a regular habit of saving every month. Awesome.
If you have skills and money to beat all of the above odds, then please continue on your Direct Stock investment journey. For everyone else, I don’t see any reason to continue Direct Stock investments, except for momentarily experiments and fun.
I hope you liked the article, please leave your comments in comments section.
Originally published at The Simple Personal Finance.