One of the key issues faced by most equity investors right from the moment s/he starts investing is whether to go for stocks or equity mutual funds, or both. As it is complicated issue, the answer too is not simple.
The common belief is that equity funds are only for those investors who are not well equipped to invest directly in stocks. But the truth is that mutual funds can be an ideal tool for the common man as well as a seasoned equity investor since they offer a variety of products like diversified, specialty thematic sector opportunities and exchange traded funds.
There are funds that follow a focused approach. Here, the fund manager believes that it’s better to concentrate a portfolio’s asset to a small number of stocks considered to be of high quality. Even trough focusing on relatively few stocks has its own advantages a sharp focus too can have its consequences, especially in a falling market.
Mutual funds also offer a variety of philosophies and styles such as contrarian and value investing which even a seasoned investor will find it difficult to practice. Thus, it would be completely wrong to brand equity mutual funds as an investment vehicle only for the common man.
While a new investor begin with diversified funds, experienced investors who only have stocks in their portfolio can supplement it with the help of equity mutual funds. For example, an investor who may like to invest in banking stocks presently will be limited by the number of stocks he can buy. On the other hand a combination of banking stocks and a banking fund can do wonders both in terms of diversification as well as potential to benefit from the possible rise over a period.
Similarly, if an investor decides to exit a sector and reinvests the proceeds in another then sector funds can make things easier as they not only provide a readymade portfolio but also the flexibility to move the entire money among sectors fast. For an investor who is a couch potato, index funds can be a good bet.
It’s true that someone who has the ability to select the right stocks and monitor and analyze the impact of various on companies’ growth in tier portfolio can earn better returns compared to a diversified vehicle like an equity fund. However, it’s also true that if the stock selection is not good then one gets exposed to a much higher risk compared to an equity fund.
Let’s not forget that equity investing requires skills both in terms of stock selection and monitoring the progress of the companies included the progress in the portfolio. Stock prices move to anticipate events as well as reflect the current events.
Thus, considerably research is required to forecast the performance of an economy industry and a particular company. For someone who does not have the knowledge, it can be quite overwhelming to manage a portfolio of stocks.
Hence a fund manager, whose decisions are supported by strong research, is able to make rational decisions about which stock to include in a portfolio and which to sell. Besides, investing in a mutual fund rather than directly in stocks has many advantages. Apart from being an easy method of investing it’s easier for track the performance as an investor has to track only one price, net asset value (NAV) in instead of several stock prices.
Although the tax benefits offered by stocks and equity funds are the same, equity funds can be more tax efficient especially for whose who opt for the dividend payout option in an existing fund, the short term capital gains get converted into a tax free dividend as the fund manager pays dividend offered by equity funds are generally higher compared to stocks.
There are also investors who find stocks quite exciting as they get to hear only the success stories. But remember that direct investment can be very risky if the stock selection and monitoring process is faculty – investing on tips, investing to make quick money and failure to track the price movement.
Many investors who invest in stocks are inspired with the high growth in a few stocks and keep investing in the market completely ignoring the overall returns on the entire equity portfolio.
For a serious and genuine investor, it’s important to focus on the overall growth of a portfolio rather than look for excitement. The financial future depends on where one invests the hard earned money. Mutual funds can play an important role in achieving most of the investment goals. The biggest advantage of investing in mutual funds is diversification. This not only reduces the risk, but also allows an investor to own a well balanced portfolio that has the potential to perform in different market conditions. Besides professional fund management, efficiency low cost, liquidity and ease of investing experienced as well as in experienced investors.
While the idea is not to say that one should direct equity investment a combination of both can do wonders to the long term health of a portfolio. But for those who find it difficult to follow or choose stocks directly mutual funds alone can do the job.