While the equity indexes are seen to scale to new highs, there has been outflow from equity mutual funds for the eight consecutive month in February 2021. During the same period after the corona led rout, indices continued to hit new highs and investors offloaded their positions in equity mutual funds on profit booking.
And so typically investors who have remained invested in equity mutual funds have been booking profits when Nify and Sensex have soared to new highs of 15315 and 52,154, respectively. Also, at such high elevated levels, new investors are unwilling to park their funds in equity mutual funds.
Also, another reason cited by experts for this outflow is channelisation of the funds from the basket to other instruments such as IPOs which have been highly lucrative this time and equities too for that matter. Other area of investment seen is the real estate which is offering good entry point currently.
This was in contrast to the debt mutual fund space, where there has been net inflow in the February month.
Now why investors are preferring stocks over equity mutual funds?
During the lockdown period when high income earners were left with surplus funds they tried their hands in the stock markets and in turn for the financial year i.e. just about to close there have been added record demat accounts. And for those working in the broking industry, there has been reports that owing to high transaction volume, employees shall get a huge bonus.
In the case of equity a single or a bunch of stocks if selected taking into account the right approach or techniques can reap good returns. But in the case of a mutual fund, fund house has to go by the portfolio diversification rules laid down by the SEBI. Though, investment in mutual fund is fruitful in the sense that any sharp loss in one stock of the mutual fund portfolio may not result in significant losses for the mutual fund investor.
Cost advantage in case of equity
Also, advantage with equity over mutual funds is that the former entails lower cost by way of brokerage when transacting and trading in the stock other than the demat charges that may be charged annually.
But in the case of mutual funds there is charged an expense ratio for the maintenance of investors' fund. And this can go as high as 2.25% of your invested amount year on year.
But the mutual fund portfolio is suggested for someone new to equity investing as the cost may be burdensome if you end up buying stocks that do much harm to your wealth than adding it up.
Tax-wise- MFs score over direct equity
In case of mutual funds, tax implication arises at the time of redemption of funds. But in case of equity every time one sells equity or book profits, taxation rules follow. Also, in the case of equity mutual funds, gains realized or switching between stocks or sale of stocks is not taxable. So, that ways mutual fund are better and more tax-efficient. Notably, dividends from both are taxed at an individual's slab rate.
Now what should equity mutual fund investors do?
If you are invested in equity mutual funds do remain put as the direct equity investment entails a lot of knowledge on valuations,fundamentals and there is good enough scope for markets to further run up from here. This is suggested only in a case you do not need funds urgently.