In this blog, we will take up some such choices related to money and give our own perspective. While your methodology and decisions may be quite different from us, it is important to have a good framework for making good decisions.
Today we explore the first question: Should I buy stocks myself or invest through equity mutual funds?
For majority of those looking for building wealth or for achieving their long term financial goals, there is no choice but to consider investing in equity shares. The question really is: should one buy stocks oneself or invest through equity mutual funds?
Let us first understand the difference between the two and then evaluate the pros and cons.
The real difference between the two approaches is that while in the former, you do-it-yourself, in the latter you outsource the task of fund management to a professional firm. Along with that, the firm also takes care of many other tasks related to fund management, e.g. accounting, administration and paperwork, record-keeping, etc. for these tasks, the fund management company levies certain charges.
Most discussions highlight these charges as a cost and hence, it is tempting to save on these expenses. However, the cost of the services rendered must be seen in light of the benefits derived. The cost of investing through mutual funds would be:
- Roughly 0.2% p.a. to 3% p.a. It varies from scheme to scheme and depends on many things, primarily the type of scheme and the size of money invested in the scheme
- Loss of control, since an investor in a mutual fund scheme has no say in how the scheme would be managed.
As against these costs, the benefits are:
- You get a team of professionals to manage your money as well as carry out many other related tasks, as we have already mentioned earlier.
- A professional manager is likely to be more skillful than most individual investors as well as also likely to spend more time on research and study of the securities, the markets, the economy, etc.
- Even those investors, who are great at investing, may not be interesting in many mundane tasks like record-keeping or accounting.
- As against an individual investor, a fund management team has to be more process oriented and disciplined. The SEBI regulations and the fund company structure ensure these. All the decisions taken by the fund management team are recorded and hence learning is possible. Compare that to an individual investor, who takes many decisions, often without having a plan or a strategy in place.
- If you have chosen a diversified mutual fund scheme, you will get diversified portfolio at low cost. This is often not possible for individual investors, either due to low investment amounts or due to indiscipline.
Give the above discussion, the verdict should be very clear. Investing directly in stocks could be good only for those who have lots of money and lots of time – BOTH. Rest all would be better advised to invest through equity mutual funds.
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“Though small was your allowance, you saved a little store, and those who save a little shall get a plenty more.” On this savings note, we wish you a happy and a prosperous journey ahead.
Contributed generously by:
Author, Speaker, Blogger, Trainer
Trained more than 61,000 participants in over 1,040 workshops across 104 different locations across the country. Published over 380 articles for mainstream media, e.g. Times of India, Business Standard, Outlook Money, Mumbai Samachar, Mid-day. Author of a “Riding The Roller Coaster – Lessons From Financial Market Cycles We Repeatedly Forget”, published by TV18 Broadcast Ltd, a CNBC group company.