Direct Equity Or Mutual Funds; Which is Better?

There are a set of investors who choose to invest for themselves, while there are a set of investors who go through mutual funds. Which is better?

There is just one simple answer for this. If you are a novice and have no idea of stock picking, including fundamentals and technicals, choose the mutual fund route.

On the other hand if you are a professional do it yourself after a careful analysis.

If you carefully analyse a mutual fund portfolio, it includes the usual stocks of HDFC Bank, ICICI Bank, L&T, Infosys, TCS and the like. We cannot think of these stocks not making it among the top 5 in the portfolio of a large cap mutual fund.

How difficult is this for an investor, even if he is a novice to choose?

Now for a mutual fund investor, he has to bare the expense ratio of the fund.

That is the expenses of salaries of fund managers, administrative and other expenses that a mutual fund incurs, which can be as high as 2-3 per cent.

For example, the HDFC Top 200 fund has an expense ratio of 2.23 per cent. This is in the end borne by the investor.

On the other hand there is also an exit load, if you sell a mutual fund. It varies from scheme to scheme, but in general the charges are 1 per cent for an exit from the fund before one year.

All this in the end tends to reduce your returns, as compared to when you invest by yourself.

As mentioned earlier investing by yourself is not an easy proposition unless you have a thorough understanding of fundamentals.

These days people also do not have the time to track their stocks even if they have the knowledge. This may leave them with an incorrect time for exit. It is therefore best to choose a mutual fund scheme.

Conclusion

If you are reasonably confident of your knowledge on fundamentals of stock picking, go ahead and do it if you have the time.

Otherwise, it's best to take the mutual fund route at a cost of course.

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