Why mutual fund route is a better option than direct investing in stocks?

Mutual funds are a better option than direct investing in stocks

 by Rajeev Pathak

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Synopsis:

Sometimes, we as individual investors feel like buying shares directly on the stock exchange. Why we should invest in a mutual fund when we have opened a trading account? Our view is that there are reasons to prove that investing through mutual funds might be a better option than directly investing in stocks:

Portfolio diversification:

Mutual funds hold a basket of investments, spreading our money across sectors and multiple companies. This reduces risk compared to putting all our eggs in one or a few stocks. Even if a few companies in the fund perform poorly, others can balance it out.

Professional Management:

Mutual funds are overseen by experienced fund managers who research, select, and manage the investments within the fund. AMCs (Asset Management Companies) have a prescribed set of systems and procedures for selecting stocks for investment or reducing the holding. Their buy and sell reports are published every month. This way the transparency is taken care of. At the same time, the laid down rules also eliminate the role of emotions in making an investment decision which we generally face, as individuals. We benefit from their expertise and constant monitoring, allowing us to focus on other areas while our investment grows.

Privy to information:

As mutual funds invest millions of rupees in any company, genuinely good quality companies treat their management with respect.  They are allowed to visit plant sites and discuss their performance and plans with company management. This benefit is not available to us as small investors.

Lower Costs:

Mutual funds have lower transaction fees compared to buying individual stocks. Moreover, TER (Total Expense Ratio) is also capped by regulators like SEBI. Additionally, they can leverage their buying power to potentially acquire stocks at a lower cost per share than we might achieve as individuals.

Ease of Investment:

Mutual funds offer a simple and convenient way to invest. We can invest a fixed amount regularly through SIP (Systematic Investment Plan) and leave the funds management to the professionals. This allows for a disciplined and hassle-free approach to investing.

Firm allotment & private placement:

Mutual Funds are offered firm allotment as institutional investors. They also participate in private equity placements, just before a company goes for an IPO. That gives an upper hand over small investors in acquiring shares in good companies at a fair price.

Conclusion:

In light of the above, we may say that investment through the mutual funds route is a better option to take exposure in equities, in comparison to buying stocks directly on stock exchanges.

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