Radha Consultancy : Investing in Equities - Through Market vs Funds

As soon as lockdown started, there was an increase in the number of demat accounts opened. The story goes like this. Around eight million new demat accounts were opened between January 2020 and November 2020. On the other hand, around four million new portfolio fund accounts were opened in the same period. Amid COVID-19, in this new year of 2021, what is good for new young investors entering the markets? Is it good for them to go directly to the stock market? Is it advisable to directly land in equity mutual funds? Let us see. There are advantages and disadvantages in every kind of event. Let us now look at the pros and cons of each category.

1. Stock Market Knowledge

Those who come directly to the stock market think of it as a playground. The stock market is not a playground and it is not easy to play this real market game. Stock market veterans know this well that it is a full-time profession. The fact that mutual funds exist is because it is difficult for common investors to operate directly in the stock market. There are good proven fund managers who know about the markets and on how to manage the funds.

2. Stock Selection

When we invest in funds, we cannot buy the shares which attracts us or what we believe in. Buying of shares in the funds depends on the management skills of the fund managers. At the same time, if we deal directly in the stock market, then we can buy as much shares as we want in the ones where we have a lot of conviction.

3. Fund Manager

Considering the above two points, fund managers are better positioned to select the suitable stocks because of their knowledge and expertise. In the case of common investor, usually stock selection skill is low, and they operate in the stock market mostly by trial and error, which may harm them in the long run.

4. Volatility and Returns

The ups and downs of the market is a common thing and both cases face fluctuations. Does not matter whether you are directly in the market or through the funds. Our profit is the net gains between these ups and downs. When we enter the market directly, if there are a lot of fluctuations, then either the profit swells or the loss is very high. In the case of fund investments, the fluctuations are very low as the fund invests in around 30 or 40 shares and this way, we get diversification benefits in funds.

5. Risk

From the above point, direct markets carry high risk because of concentrated stock holdings and the risk is low when investing through mutual funds because of diversification.

6. SIP

SIP investment is a highly popular method in funds. The same process is available in various direct stock market trading platforms. Through this we have the possibility of buying the same stock in small quantities periodically to get an average price.

7. 80C Tax Benefits

We have the facility to avail tax benefits when investing in certain types of funds called ELSS. There is currently no provision in the direct stock market operation to avail such tax benefits.

8. Time

When we are directly involved in the market, we need to invest a lot of time too. For example, we should read to select stocks, buy the selected stocks, and maintain the stocks. This work requires a lot of effort. At the same time in the case of funds, we only put effort to choose a suitable fund and the rest is managed by our fund manager.

9. Expenses

When buying a stock directly in the market, we must incur the expenses like demat fees, brokerages, STT etc. Same way in the case of funds, we must bear the fund management charges which is represented as expense ratios.

10. Emotions

This is a very important factor in the investments. This is the least discussed but an unavoidable factor. The fact is that the impact of our emotions is different with respect to direct investment in the stock market and through funds. Research has shown that the profit and loss of the stock market is more dependent on our emotions than our stock market knowledge. When we take part in the direct market, our adrenaline secretion swells in our body to the tune of stock market variations. When investing in funds, the influence of these emotions seems to be a little less.