Investing in equity mutual funds vs stocks
Equity is one of the best asset classes to build wealth over long term. The benchmark Nifty 50 and S&P BSE Sensex indices have returned 14% each over 15 years to May 31, 2016 (Source: Crisil Research) . However, direct investing in equities requires for a lot of time and expertise to research about stocks spread across various sectors and also to keep track stock movements. Most importantly, direct investing can turn out to be a risky proposition, if done without proper due diligence. In such a scenario, investors can look at equity mutual funds (MFs), which offer exposure to equities and related instruments, but involve relatively lower risk, thanks to professional management and diversification. This article throws light on types, benefits and modes of investment for equity MFs.
Table 1: Investing in stocks versus equity mutual funds
Equity MFs also offer a host of other advantages
Chart 1: Benefits of Mutual Funds
Diversify across stocks and sectors
Equity MFs help investors diversify their portfolio and lower concentration risk. Investing your entire kitty on a handful of stocks/sectors could erode your portfolio value, if they underperform. Hence, it is important for investors to diversify across stocks, sectors and market capitalization and spread risks optimally. Diversified equity MF gives exposure to several stocks across sectors and market caps, compared with direct investments in stocks.
Experienced and skilled professional managers look after equity MFs’ portfolios. These
fund managers have access to a strong analytical pool, which enables them to conduct extensive research, analysis and select better avenues. In addition, as they monitor the market constantly, they can review and rebalance the portfolio periodically, which helps weed out non-performers. In comparison, individual investors can find all this daunting along with their jobs or businesses.
Help you to get optimal returns
Equity MFs aim to attain long-term capital appreciation by investing in equity and equity-related instruments. A rise in the underlying equity
instruments leads to gains in these funds.. CRISIL – AMFI Equity Fund Performance Index has outperformed the market benchmarks, Nifty 50 and S&P BSE Sensex, across most periods - over 10 to May 31, 2016
Table 1: How the equity MFs performed across time frames?
*Returns (%) are as on May 31, 2016 and above one year are annualized (Source: Crisil Research)
Huge universe
The universe of the equity funds is big (Chart 2). Investors with higher risk appetite can consider small- and mid-cap or thematic funds. Moderate investors can choose index, large-cap and diversified funds. Investors could also opt for equity-linked savings schemes (ELSS) equity-linked savings schemes and Rajiv Gandhi Equity Saving Scheme (RGESS) {for first time investor} for tax planning.
The choice of the scheme should be in line with an investor’s financial goals, risk profile, return expectations and investment horizon. Seek help from a financial/mutual-fund advisor to pick the right scheme.
Chart 2 :Types of Mutual Funds
Mode of investing in equity MFs – Lump sum or Systematic Investment Plan (SIP)
While there are two modes to invest in equity MFs – lump sum or
SIP – there is always a debate on which mode to choose? Lump sum works well for investors who know the skill of market timing, i.e., entering and exiting at lows and highs, respectively. It also needs expertise and time to track the market. Investors who do not have such wherewithal can burn their fingers, given the huge swings (called volatility) of the market. A lump-sum investment may also call for bigger investment amounts at a time, which may not be possible for all investors. In such cases, SIPs can be the best way, wherein investors can park a fixed amount at regular intervals in equity MFs. SIPs also bring a disciplined approach to long term wealth creation and safeguard investments from market volatility, as investors are invested at both low and high points.
Summing up
Iinvestors who excel in market timing and stock picking can invest directly invest in equities, while others can take exposure to equity MFs which is less risker than direct investing providing professional management, diversification, better returns and tax efficiency.
Disclaimer
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related document carefully.