Mutual funds or stocks?

Some investors swear by picking stocks themselves and making big money. Some others feel their money is better managed by mutual fund houses. When an investor buys a stock, he owns a piece of the company along with thousands of others like him. On the other hand, when an investor purchases units of a fund, he owns a chunk of diversified securities and bonds. Is investing directly in stocks better or owning mutual fund units? It varies from investor to investor. Let us see why.

Investment amount

If you have a small amount money set aside for investment purposes, it is better to settle with mutual funds. This is because when you own fewer stocks adequate diversification is not possible. You'll be carrying unnecessary risks on your small stock selection for no additional returns. Mutual funds take care of diversification and mitigating risks.

Time and expertise

Some people have the expertise and time to research. They understand their risk appetite and know which stocks work best for them. For others, mutual funds mean sheer convenience. They leave the job of fund selection to the fund manager on whose expertise, they repose complete faith. The task of timing, placing a buy or sell, tracking transaction and market research is left to the fund managers.

Diversification

Individual investors cannot fully diversify as their investment ability is limited. Further, they need to put in effort daily on research and management. Fund houses are flush with cash and explore the numerous investment avenues to achieve ample diversification.

Small companies

Large fund houses cannot afford to put bulk of their money in small companies that hold lot of promise. It is an undeniable fact the large companies usually give lower returns as their performance has already peaked. However, small and mid-size companies have greater scope of giving better returns as they still have a huge potential to do better. As an individual investor, you can buy stocks of small companies and take risk that you can digest. A fund house may be unwilling to expose a considerable chunk of their portfolio to small companies.

Expenses

Mutual funds come with their own set of fees as entry and exit loads. You'll further be charged if you seek to make changes to your fund options. However, as a smart individual investor who invests with a long-term goal, you can save on transaction expenses and taxes.

Risk

The element of risk in investing directly in stocks is very high. What if the company whose stock you hold suddenly goes bankrupt? You'll have to bear the full brunt of this. On the contrary, since a fund house invests in many companies, the event of some company going bankrupt has minimal impact on the unit holders. Hence, the risk is lower. For those who do not want to relinquish control of their investment decisions and have time and expertise, investing directly in stocks may be advisable. For the rest, who want to benefit from the convenience, management and ample diversification, mutual funds may be the solution.

Source: Economic Times