Every time I wonder when my friends say that they have done profit of so much of amount by selling such and such stock. I wonder because I make losses most of the time rather than making the profit. Even if I manage to book some profit, it is very less which does not even meet 10% ROI.
Though I have spent some time to learn the art of stock picking, the optimum time to hold and release of stock and number of other features, it does not work for me at all. Some persons are regular in stock trading and they do well in terms of profit whereas most of the investors are losing their money in the direct trading of stocks. Here comes the investing in mutual fund.
Mutual funds are common funds from different investors which invest money in stocks, funds or bonds with a help of a professional fund manager or group of fund managers. The mutual funds which invest in stocks are called as equity mutual funds. There are various categories of equity mutual funds according to the category of stocks in which they invest such as Large Cap, Mid cap, Small Cap etc.
Let us explore the mutual funds vs stocks and how the Mutual fund can be preferred over stocks.
Low risk of Investing
By investing in a mutual fund you are using a fund manager’s expertise. Every scheme has dedicated fund manager to manage a particular mutual fund. Under the leadership of an expert fund manager, there are various experts who can actually do research on companies, stocks and their growth potential.
They also track the stocks and take the decision of selling and fresh investments. This level of tracking and research is very difficult for individual investors and most of the time we failed to follow the stocks so intensively. Thus, your investment is exposed to low risk and better professional fund management which has actually large potential to grow high.
SIP Option of Investing
Mutual fund investing has the systematic option which means you can invest at regular interval of your choice. The SIP option allows you to invest as minimum as RS 500 per month to a mutual fund. It is a very strong method of accumulating wealth for a longer term. Though there is an option of SIP for a specific stock, it is not attractive due to its inability of diversity. If the specific stock decreases over the years, it will dampen your portfolio.
Lower Income Tax
If you are involved in direct trading of stocks, you have to pay short term capital gain tax on selling of stocks within one year. The profit from the selling of stocks after one year does not attract any capital gain tax. The short term capital gain tax is straight 15% on the amount of capital gain.
In the other way, when the stocks are bought and sold by the mutual funds does not attract any capital gain tax to the investor. Remember, you have to hold the equity mutual fund minimum one year to avoid short term capital gain tax. For ELSS funds, you cannot redeem the fund before three years.
Brokerage vs Fund Management Charges
You pay brokerage charges when you buy and sell stocks directly in the equity market. There are stamp duty and Securities transaction tax also. Some stock brokers charge 0.2% to 0.5% as the brokerage charges during buying and selling both. There is also annual maintenance fee for the Demat account.
The mutual funds are charging only 1.5% to 2% as the fund management charges. For mutual fund investing you don’t need a Demat account. The mutual funds have the lower brokerage charge due to its large volume of trading which in turn lowers its fund management charges.
Diversification with Small Amount
When you start investing in a mutual fund, you are investing into a basket of stocks, not in a specific stock. The basket of stocks comprising of stocks of different sectors such as software, engineering, pharma etc. Even if you are starting a SIP with Rs 1000, it is invested in various stocks under that particular mutual fund. In another way, the diversification though different stocks needs a large amount of money.
Also Read: SIP Vs RD: Which is Better for Investment
From the above reasons, it is clearly understood that mutual fund investing needs less attention, less knowledge, less tracking for a decent return. Investing through SIP in equity mutual fund is a good way to create significant wealth for a longer term. Those who know stock picking and can track each and every movement of stock can think of stock investing directly.
In this regard, I have not completely stopped investing in stocks directly because I love to see the market movement and businesses. At the same time, I invest regularly in the mutual fund which is growing more than the direct stocks.
Please share your experiences about investing in Mutual funds over stocks.