Should You Prefer Mutual Funds over Equities?

Photo: The Financial Literates

I get lot of mails asking me, whether investing through Mutual Funds is less riskier than through direct investment in stock market. Also, they ask if the risk return  ratio is same in both the cases or not.

#No it is not at all less risky to invest through mutual funds, as they also deploy their funds in the stock market. However, in the initial stages, when an investor has not much exposure in the capital market, he/she can take the Mutual Funds route, provided they have some information on the quality of the fund manager.

#2ndly, Mutual Funds can only buy, they cannot sell, unless there is redemption of the fund. In case of open ended funds, they will keep on holding on to your investments in various  securities, unless you ask  them to sell and return your money. This means if the stocks in your portfolio suddenly falls, from the yearly highs, then you might also get negative returns in your portfolio, inspite of stocks making yearly highs, sometime in the year. 

Since, Mutual Funds cannot sell, you cannot do both ways trading in your portfolio which is very essential in a falling market or when the market is trading sideways. 

#In case of stock market, you research a stock and not only invest but also have keep track of the same. In case of Mutual Funds, you are at the mercy of the fund manager in terms of stock picking and at the same time you need to  keep a track on the NAV of the funds. This means you cannot sleep keeping your money in Mutual Funds.

#In case of equities, you can track a few stocks  and play. But in case of Mutual Funds, choice of funds is a big issues, as there are various types of dishes available, viz. small cap, mid cap, real estate, infrastructure, etc funds available at your disposal; apart from being close ended or open ended. A novice investor, generally gets confused as where to invest.  

#Investment through SIP can be dangerous, as the Mutual Funds will deploy your funds even when the market is at the peak. Their work is to invest in equities, so they will  not wait for market correction to invest. This could be perilous if the market is at the peak. 

However, there are some positives also in Mutual Funds, as seen in the above photo. 

Hence, looking from all these  angles, it is always better to invest directly through equities, provided you take the help of experts.