7 Key differences between Equity & Mutual Fund Investing 2020

Mutual funds and equity are widely used asset classes across the investor community. Both the asset classes have their own benefits, advantages, characteristics and disadvantages too, which make them unique and different. However, there are some key differences which make them more unique and are also characteristics of their own which attracts investor community. Further, they also depict an investment style of their own. Below are some characteristics which are also key differences between mutual funds and Equity investing.

Ownership

EQUITY

In equity investing ownership is the key factor of investing too. Many times when an investor looks after the business and the fundamentals of the company. He or she decides to buy the shares of the company and hold the shares of the company for a long term horizon of more than 1 years to 5 years. There the investor is the shareholder of the company for the number of shares he holds in the company. A share holder is a part owner of the company for the shares owned by him. The ownership of shares is directly with the investor or shareholder of the company and no one else.

Mutual Fund

In mutual funds the ownership does not fall into the hands of investor investing in the fund. For example, If investor A invests Rs.1 lakh into Nifty index funds and the Fund manager buys the stocks according to the pre-decided allocation. The ownership of those share bought lies with the fund house and not the investor A. Investor A is a passive investor investing into the market through the mutual fund for long term view. Ownership gives added benefits like rights issue, bonus share, dividends etc, which are not entitled to the mutual fund investor as he does not have ownership of those shares.

Risk

Equity

Risks and returns go hand in had in capital markets, in whichever way you invest. Risk taking ability also derives the way you decide to invest in the market. People who are willing to take risk at their own hands invest directly in equity. Equity bears higher risks as compared to other safer investment asset class like mutual funds, bonds, ETF’s etc. However, the returns generated through direct investing into equity are also high. Hence, investors are more attracted towards the direct equity investment. Risk into equity also varies according to the stock you choose to invest and the time you wish to hold the stock. Risks are higher in short term investing, while risks are comparatively lower in long term investing.

Mutual Funds

Each mutual fund advertisement ends with line we all are familiar with. Mutual fund investment is subjected to market risks, please read all scheme related documents carefully before investing. Yes, we all know it by heart. The statement makes it clear about the risks involved in mutual fund investing. However, the risks in mutual fund investing is comparatively low as against direct equity investing. Hence, the investors who wish to gain returns from the market, but have low risk-taking ability invest mutual funds. However, risks involved in mutual fund investing also vary according the area of investment or scheme. If a fund is focused on investing in high risk stocks like small caps which bear high risk and reward ratio, the investment in these funds will be riskier than other funds.

Diversification

Equity

Equity as an asset class gives you autonomy to invest in various types of equities covering various sectors. However, as an individual investor who has less knowledge or skills about investing does not benefit out it. He keeps investing in selected names with large exposures, creating more risks for him in his investment. Also, lack of knowledge often impacts on the missing big opportunities in different sectors and types. Also, less risk-taking ability makes an investor to stick to selected stocks, sectors, companies only. This impacts the profitability of the investors as selected names and sectors are usually highly traded and hence get less returns in bullish market. Where as the lesser known but fundamentally strong companies get higher returns when the markets move on higher side. On the other hand, when market changes tide and moves downwards theses well known companies are the first ones who go down leaving no room to exit at higher levels.

Mutual fund

Mutual fund is vast category of investment asset and gives opportunity to reap the benefits of all investment classes like NCD, ETFs, stocks, commercial papers, etc. Mutual fund uses the scheme fund focused for moderate risk takers in some high risk and low risk stocks keeping the overall risk on a moderate level. The diversification helps in maintaining overall value of funds intact. For example, if a fund holds 10 stocks in the portfolio and 5 out of them are trading low and 5 are trading higher the overall impact on the portfolio is less. In crisis times the diversification helps in reducing the losses of the overall portfolio. The risks of investing in direct equity is mitigated as the fund portfolio is diversified.

Reliability

Equity

IN equity the funds invested by a retail investor with his own knowledge might benefit sometimes and sometimes it may not. When the profits are not made in equity and one bears huge losses, he gets discouraged to invest further. Sometimes, he takes unwanted decisions of relying on some fake and fishy stock tips and loses all the money left with him. This is the story of most of the beginner investors who rely on self-knowledge which borrowed from some other person without studying and end up loosing money. Self-reliability on investing in equity directly without proper knowledge and research is deadly combination for any investor. Most of the times the investors with just aspirations and without knowledge loose more money. There are wealthy investors who pay to advisors for relying on them to invest in the equity directly, whose fees are very high and such a luxury is not accessible to all small investors.

Mutual Funds

In mutual funds a person can rely on the fund manager as the money is in the hands of the fund manager and at a discretion on where to invest. The fund manager is person who has decade of experience and knowledge in the market and does research on the stocks and markets and considers all aspects of company, economy, sectors, etc before investing your money into the market. Hence, in mutual funds the investor can rely on the fund manager and his past performance for the returns which are promised to investors. Secondly, it gives a peace of mind for the small investors also about the reliability on the fund house or the fund manager and not to worry about the money. Lastly, they carry stringent risk management norms which helps in keeping the investor capital intact in a bearish or downward scenario also.

Affordability

Equity

Cost of investing money into equity market is also one of the key factors of generation wealth from the equity markets. There are ample of charges and costs attributed to equity investing and some of them vary time to time and some remain fixed. These costs include brokerages, taxes, charges, AMC (Annual maintenance charges) etc. which at the end of the year make your returns minimal. It also depends on with whom you are holding your demat account and the charges and brokerages levied by them. The profits after cutting these costs are very low. Hence, the cost of directly investing into equity is high and varies time to time depending on the various factors.

Mutual funds

Costs of mutual funds are very less as compared to the equity investing. Investing in mutual fund does not require demat account and can be invested directly using bank account also. So, the major costs of demat accounts like brokerage, AMC charges, etc are not levied. Secondly, you can directly use your bank account for monthly deduction of SIP into mutual funds. The costs involved into the mutual funds are as less as 1% of the total amount invested, which are comparatively very less as against equity investing.

Resilience to volatility

Equity

Equity investing is highly risky largely because of volatility involved into it. Investors who invest large sums of money into market have solid mechanism s to minimise their losses by continuous monitoring and maintaining liquidity into account. On the other hand, the retail investors who generally have less amount to invest in the market face the brunt of volatility many times. Equity investing has very less resilience to volatility and has high impact on one’s portfolio. In equity a stock opened 5% upper can go down 10% in immediately in matter of few days, hours, minutes also. In such time you have strong technical systems and support then you can exit the market at much earlier stage to minimise losses. But for those who don’t have such dynamic software and systems face the brunt of volatility and end up making losses.

Mutual fund

Mutual funds traded on the show the collective price change of the fund in the NAV (Net asset Value) per unit. The NAV’s remain stable and are not very volatile like the stocks. It is largely because of diversification and proper asset allocation. The asset allocation helps in keeping the impact of volatility in check. For example, if in a portfolio of 10 stocks in particular fund with 3 stocks are highly volatile and change up and down on daily basis. The overall impact of those volatile three stocks is very less on the NAV of the mutual fund. Hence, you don’t see the upswings and downswings in NAV prices of mutual funds as you see in stock prices of the equity. Hence, its small investors prefer invest in mutual funds and safeguard their capital.

Returns

Equity

Equity returns are the key important factor which attracts lot of investors to the capital market. Some of them get lucky with getting multibagger returns, while some of them bear huge losses also. However, a with a right investment strategy and a long-term outlook one can book great profits in market also. But the chances of making heavy losses also cannot be ruled out. This can be largely attributed to various conditions such market conditions, risks involved in the market, etc. If a person balances all the above factors well, he can make good profits in the market by investing in equity. However, these profits may not necessarily be consistent, they may vary according to market conditions, fundamentals of the stock or company, demand for the stocks etc. Hence, for investor who is looking for investing into equity should hold the stocks for longer period of time to get good profits.

Mutual Funds

IN mutual funds returns are not guaranteed or promised but the returns can be made consistently over period of long term. Also, the returns are comparatively less as against equity, mainly because of minimised risks. For investor whose aim is to protect the capital and make little returns each year, mutual funds are the best vehicle he can consider in a long term. As in equity a person looks for profits on regular basis and can take risks, sometimes makes good returns but there are chances of capital erosion too. That’s why many small investors prefer mutual funds over equity which safeguards their capital and also gives them some returns each year, which over period of long term is beneficial for the investor.

Above are the 7 key differences which we define the above way of investing. These key differences are attributed of how the investor characterises his or her investment style.  Both the investment vehicles lead you to the destination of financial freedom.  Which one you choose to go by towards the destination depends on you.