Should you invest directly in stocks or equity mutual funds


Whether one should invest in Mutual Funds or Direct Stocks is a very common dilemma faced by investors.

There’s no one right answer for this though, with either mode you would eventually invest in the equity market.

The responsibility when you’re investing in direct stocks is completely yours whereas when you’re investing in mutual funds, the responsibility is divided among different professional experts.

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Direct Equity

Investing in direct equity means purchasing shares of a publically listed company, in simple language it means becoming an owner of the company to the tune of your share.

Being an owner brings along with it certain rights like being able to attend Annual General Meetings, being able to vote, etc.

The two primary sources of gain as a shareholder are via:

  1. Sale of Shares
  2. Dividend Earnings

Before purchasing the shares of any company, as an investor you need to go through various points like:

  1. Management of the company
  2. Financials of the company
  3. Sector the company is currently in and
  4. Various other external factors.

The risk is higher as compared to mutual funds but so are the returns, the risk profile of an investor needs to be on the higher side to venture into direct equity investing.

Needless to say, only those able to afford to stay invested for a longer time period say 10 years or more should consider it.


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Mutual Funds

A mutual fund is an entity that pools money from various investors and then invests this money into various asset classes such as stocks, bonds, cash, short term debt, etc.

They are operated by professional fund managers and in compliance with various regulations.

The two primary sources of gain as a mutual fund holder are via:

  1. Sale of mutual fund holdings
  2. Dividend Earnings

You can only lay claim to dividend in mutual funds if you go for ‘Income Distribution cum Capital Withdrawal’ option and not when you go for growth option.


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Differential points between Direct Equity Investing & Mutual Funds

Demat Account

For investing in direct equity, you need to have a demat account.

This is not a necessity for mutual funds.

For investing in mutual funds, all you need to have is a bank account and have your KYC verified.


Risk & Returns

In direct equity investing, risks are on the higher side and so are the returns.

In equity mutual funds relatively speaking, risks are on the lower side and so are the returns.

In a equity mutual fund scheme even if one of the stocks gives negative return, it can be balanced out by other stocks since mutual fund portfolios are diversified.

There are also limits with regards to maximum exposure in one particular stock in a particular equity mutual fund scheme.


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Tax Savings Benefit

You can save taxes by investing up to Rs 1,50,000 in elss (tax saving) mutual fund schemes.

There is no such option with direct equity investing.


Personal bias

With direct equity investing, there’s always the fear of personal bias setting in.

You may feel you have a very good understanding of a particular company or its sector for whatever reason.

This cannot be the case with equity mutual funds since the decision to whether invest or not in a particular company rests solely with the fund manager and not you.

Of course, you could always argue the fund manager can also have her own bias but since a mutual fund portfolio is fairly well diversified the ill effects of personal bias is on the lower side.

Low Entry

Imagine you want to purchase a share, the price of which is Rs 50,000.

You have only Rs 5,000 to spend though.

In such a case it will not be possible for you to purchase that particular share.

With mutual funds though the minimum entry point is on the lower side, you can invest in schemes with as little as 1,000 to 5,000 rupees.

You can indirectly own the share you could not earlier due to its high price if the same share is held by a particular mutual fund scheme.

Mutual funds are truly retail.


With direct equity, you are completely responsible for your choices.

In an equity mutual fund you get the expertise of the fund manager/co fund managers, investment team, advisor, etc.

This checks and balances method is a healthy filtration process.

With direct equity investing, there’s a higher chances of personal bias setting in.


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With direct equity you have complete control over which shares to buy and sell and when.

That is not the case with equity mutual funds.

With equity mutual funds, the decision rests solely with the fund manager.

So the fund managers are bound by regulations for all categories and they have to abide by them, they can still pick and choose which shares to buy and sell and when as long as they are within the guidelines.


Investable Amount

With an equity mutual fund, you can invest smaller amounts via SIP on a monthly basis.

This is not possible with direct equity investing.

This is because often the amount you wish to invest can fall below the share price.

With an equity mutual fund though you can still purchase that share indirectly.


Tracking the portfolio

Direct equity investing is not merely about investing in the ‘best stocks’ and building wealth.

You need to keep a track of your portfolio periodically.

This does not mean you track your portfolio daily but you do need to be updated with regards to any changes such as:

  1. Change in management
  2. Consistently poor numbers
  3. Any new government regulation affecting the core of operations of the business etc.

This is not to say you do not need to track your mutual fund portfolio but with a mutual fund portfolio, the time and effort required is on the lower side.


Be it direct equity investing or equity mutual funds, for both you need a longer time horizon of five years or more ideally.

Equity investing, be it direct or via mutual funds is a highly specialized job which has unfortunately been reduced to taking the ‘best bet’ which is extremely dangerous for your financial health.

Both are constantly undergoing changes and yet both do not require immediate reaction to those constant changes, the reality of retail investors is vastly different though.

Direct equity investing requires constant tracking of portfolio, being able to not be reactive and having a risk profile that has been concluded by being as least bias as possible.

For most retail investors, equity mutual funds is the way to go for peace of mind and long term wealth creation.


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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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