5 Questions to Help You Decide- Mutual Fund vs. Stock Investing

What is the fuss?

Retail investors have multiple options for investing in equity. Direct stock investing and mutual funds investing are the two most common ways. But which one is better for you? In this edition, I answer this ageless debate in a question-and-answer format. The reason for this format is that no one answer applies to all investors. Let's get to it.

Q1: Which gives higher returns?

Investors invest to earn a return on their investments. The goal is usually the highest possible return. So, between direct stock investing and mutual fund investing, which gives higher returns?

Direct stock investing gives higher returns.

Stock investment gives higher returns in the long run (> 3 years). You choose a stock's buy and sell price, enabling you to make higher gains. You use buy/sell features such as limit order, stop loss, and GTT (Good Till Triggered) to buy and sell at the right price. This maximises your returns as money is made when you?Buy Low and Sell High.

Mutual Funds have to invest all your money on the date of your SIP (Systemic Investment Plan date). Even when the stock market is expensive on the date of your SIP, Mutual Funds are required to invest in the stock market and allocate you the SIP date NAV shares. This requirement makes mutual funds buy good stocks at an expensive valuation in your portfolio, leading to lower returns.

Mutual funds also charge management fees in the form of expense ratio. This expense ratio typically ranges from 0.5% to 1.5% of your invested amount. This further eats into your overall returns.

Q2: Which requires financial knowledge?

Financial Knowledge means understanding stock market technicals, a company’s balance sheet, cash flow statements, and income statements. These are the basic building blocks of stock investing.

The good news is — that you can invest with or without financial knowledge. The mode of investing will vary based on your financial knowledge level. So, which mode of investing requires financial knowledge?

Direct stock investing requires more financial knowledge.

Can you invest in stocks without any financial knowledge? You can, but it is not recommended. You will end up investing based on your perception of a company or, worse, relying on tips and social media influencers to make investment decisions.

With less to no financial knowledge, you are safe in the hands of a mutual fund manager. The mutual fund manager is a professional with an education degree in finance and 5+ years of experience investing and managing money. The fund manager has an army of analysts who support research, modelling, and stock recommendations.

Q3 Which requires less to no investment of your time?

Time is priceless. Once gone, it cannot be bought back unless you have access to a time machine. Leaving jokes aside, managing money is a time-consuming process. Apart from the time it takes to research and invest, time is also required to track new investment opportunities, review existing investments, and make portfolio rebalance decisions.

So, which mode of investing requires less investors' time?

Mutual fund investing requires less to no time from the investor.

Choosing a mutual fund scheme to invest in may require some time investment. However, this decision becomes easier with the help of a financial advisor. One can also go with a reputable fund house such as Kotak Securities, Axis Mutual Fund, Tata Mutual Fund, Motilal Oswal, Mirae Asset Management, Parag Parikh Fund, etc.

Little time is required once you have started an SIP in a mutual fund. You can review your mutual fund investment once every quarter or year. That should be enough.

Stock investing is different. Not only does it require time to invest, but it also requires time to track, rebalance, and understand the macro/microenvironment. Stock investing may only give the best returns if you can spare at least four hours weekly.

Q4: Which is more Liquid?

Liquidity means how quickly you can sell and get your invested money back.

Stocks are more liquid.

Stocks have higher liquidity. You can exit a stock by selling it in seconds during trading hours (9 am to 3:30 pm). Once sold, you can withdraw your funds instantly from the broker account and transfer them to your bank account.

Mutual funds have medium liquidity. Once you exit a mutual fund, getting funds back to your bank account takes 3–5 working days. Also, if you have been invested in a mutual fund for less than a year, you have to pay an exit load penalty (usually 1% of the invested amount).

So, overall, stocks have higher liquidity than mutual funds.

Q5: Which is less stressful?

Why this question, you ask?

Well, many retail investors are not full-time stock investors. We have full-time jobs, family responsibilities, and metro traffic to deal with. For a typical salaried individual, the weekends are spent destressing and relaxing, catching up on sleep, and getting ready for another week of gruelling work and hectic traffic. After all of this, investing and managing money can take its toll.

A chilled-out, easy way of investing that still gives decent returns is preferred (usually). While the stock market can give you a good kick, making some extra bucks at the end of the day, it can also cause unbearable strain if not done right or with half knowledge and less time.

Mutual funds have zero to no stress.

Stock investing is a game of emotions. Seeing your portfolio at a loss can give you sleepless nights, and a loss-aversion mindset can make less effective investment decisions. If you have steel nerves, a firm, calm mind, and the ability to take some punches and still stand back up to fight another day, stock investing can reward you handsomely. For many others, including me, it makes sense to invest via mutual funds in a less stressful way.

Parting Thoughts

There is no best mode of investing. There is just a more suitable mode of investing according to your goals, time, and financial knowledge. Financial knowledge can be gained over time, and time can be made by better organisation.

For most working folks, mutual funds (MF) work just fine. MFs double your money every 5–6 years in the Indian equity market. If you have time, capital to invest, and sound financial knowledge, stock investing can double your money every 3–4 years if done consistently right.

I do both. I personally invest in stocks I pick. I also invest via four mutual fund schemes: one ELSS, one Smallcap fund, one MidCap fund, and one Thematic fund.

The majority of my equity investments are via mutual funds, as my answers to the five questions above favoured mutual funds. As I get more comfortable picking stocks myself, I might divert more of my investment to stock investing.

What has worked well for you, stock investing or mutual funds? Share in the comments below.

Happy Investing!

Disclaimer: This is not investment advice. Do your research before investing.