The recent years have witnessed a wave of interest from retail investors towards mutual funds. However, direct equity investing also has significant benefits.
By Tejas Khoday
The recent years have witnessed a wave of interest from retail investors towards mutual funds primarily because stock prices are rising and it’s a passive route of investing in the markets. Considering the lack of basic financial awareness among the wider section of our population, mutual funds have seen record inflows. From a systemic standpoint, it makes sense because the investments are looked after by professional fund managers. Having said that, direct equity investing has always been the favourite among the ‘do it yourself’ section of people who prefer to take control of their own steering wheels. Direct equity investing has significant benefits over mutual funds. Here we take a look at some of them:
1. Higher returns than mutual funds: It is a well-known fact that stocks give much higher returns than mutual funds, albeit with higher risk and volatility in the portfolio. The potential to earn above 20% is very much possible with direct investing rather than mutual funds simply because individual companies can appreciate far more than a wide group of stocks.
2. Concentrated portfolio structure: Mutual funds are over-diversified and tend to invest more in stocks which have higher market capitalizations, which is not necessarily the best decision. Usually, smaller companies tend to outperform the well-established large peers in the medium term. On the contrary, direct equity investors can invest in aggressive companies which are smaller and the portfolio can be equi-weighted rather than market weighted which tends to give a higher return on investment on a consolidated basis.
3. No management fees: Direct equity investing involves brokerage charges based on transactions only. If you choose a low-cost broker, you can save costs significantly. On the other hand, mutual funds charge a management fee of up to 2.5% on the total invested amount on a yearly basis regardless of whether the portfolio performs well or not.
4. Flexibility: Direct equity investing allows for flexibility when it comes to timing your trades/investments and also offers a wide range of products ranging from equities, derivatives, commodities and currencies which can be used in combination to either generate an extra return or to hedge your portfolio. Such features are not available in mutual funds where investors have to entrust their savings with a fund manager to outperform the index in the long run and deliver good returns.
5. Education & knowledge: If you invest directly in companies, you tend to stimulate your mind by studying different industries and the overall business environment in general. You will be inclined to keep a track of companies’ performances which will increase your awareness about the markets and opportunities present. This is the sort of knowledge building that helps you stay relevant in the long run. On the contrary, mutual fund investing entails waiting for a very long time without the use of intellect in any meaningful way.
An important point to note is that market regulator SEBI has been making a far-reaching impact on the capital markets as we speak and regulations are very investor-centric. Unlike the yesteryears where a lack of regulations has caused panic in the markets, today the environment is stable and much more trustworthy. Also, with ample availability of information, direct equity investing is poised to be superior to mutual funds for informed individuals.
(The Author is Co-Founder & CEO of FYERS, a new-age discount broker with innovative trading platforms)