Introduction
As an investor, you have a lot of avenues to invest your hard-earned money. However, the array of available investment options makes the decision-making process chaotic. So, what are the factors you must consider before you invest? And where should you invest?
Let us explore and understand mutual fund v/s equity investing and the factors to consider to make smarter investment decisions and meet your financial goals.
Understanding Mutual Funds and Equity Investing
Mutual funds and equities are popular investment options to generate wealth over time. To make well-informed decisions regarding which investment option benefits you the most, you must understand the differences between the two.
What is a Mutual Fund?
A mutual fund is an investment vehicle wherein a group of investors with a shared goal pool in funds to create a diversified portfolio of equity, bonds, or other securities. A financial expert, the Fund Manager, manages the investment to ensure the scheme’s and its investors’ goals are met.
What is Equity Investing?
Equity investing refers to investing your money directly in the shares or stock of a specific company. Unlike mutual funds, you must conduct thorough research on the stock and the market before you invest in any stock.
Differences between mutual funds and equity investing
Mutual funds and equity investing differ from each other on the following grounds:
| Parameters | Mutual Funds | Equity Investing |
| Decision-making | The Fund Manager makes the decisions regarding the fund investment, the companies to invest in, and the purchase and sale of stocks. | The decisions related to stock selection and the purchase or sale of the stock are entirely your choice. |
| Research | Mutual funds are professionally managed. The Fund Manager is in charge of researching the stocks that comprise your portfolio. | You must conduct extensive research to identify equities that have the potential to deliver the desired returns. |
| Diversification | The Fund Manager designs and manages the portfolios. They make decisions regarding investments across various asset classes and sectors. | You are responsible for ensuring your portfolio is well-diversified by evaluating and investing in profitable sectors. |
| Asset Allocation | With mutual funds, you can choose from a wide range of mutual fund schemes, such as equity funds, debt funds, and balanced funds, to name a few. This helps in effortless asset allocation. | When investing in equities, you invest in a single asset class. You must research and explore the available stock options to diversify the portfolio. |
| Risks | Mutual funds are a haven for low-risk investors. This is because the risk is spread across various participants investing in the scheme. | Equity investing can be risky due to the unpredictable nature of the stock market. Investors investing in equity do not mind taking higher risks to earn higher returns. |
| Returns | Investments in mutual funds can give you a decent return if you stay invested for the long term. | Investment in equities can give you higher returns in a short duration (depending on the market conditions and risks). |
| Convenience | Investing in a mutual fund does not require constant monitoring, as the Fund Manager regularly assesses the markets and stock performance. | Investing in equities requires you to be well-read about the markets, the stock, and the factors impacting them. |
| Volatility | Mutual funds offer stability even when the market is volatile. This is because the investments are spread across various asset classes and sectors. | Equities go hand-in-hand with the market movements. The stock price can rocket up or plummet in a matter of seconds, thereby requiring you to monitor your investments constantly. |
| Costs | Mutual funds involve additional costs such as exit loads and management fees. These fees are lower in comparison with that of stock investments. | Investing in equities involves brokerage fees and transaction fees that vary according to trades. If you are careless with your trades, the costs might surpass the profits. |
Key factors to consider before making an investment
Though mutual funds and equity investing differ on various grounds, they are equally attractive investment options. Before investing, an investor must identify which option aligns with your goals and requirements.
Below are some crucial factors to consider when deciding between mutual funds and equity investing.
1. Understand your financial situation
Create a budget to understand your income, expenses, loans, and savings. This gives you a clear picture of the amount available for investment. Furthermore, evaluate your liquidity requirement to ensure your investment matches the time horizon and helps you achieve your goals.
2. Identify your investment goals
Before you decide to invest, have a clear idea about your investment goals. You must identify your long-term and short-term goals and plan your investments accordingly. It is essential to understand if you want a regular income, capital appreciation, or a mix of both. This helps simplify your decision-making process.
Build your well-diversified portfolio
Create wealth now!
Build your well-diversified portfolio
Create wealth now!
3. Investment time horizon
Once your financial goals are set, you can create an investment strategy involving investing in instruments for different time horizons. You can opt for long-term or short-term investments depending on your liquidity requirements.
4. Understand your risk appetite
Assess your comfort zone and understand your risk tolerance level. It is important to note that a high-risk investment has the potential to generate higher returns. This makes equities a high-risk investment in contrast to mutual fund investments. Thus, ensure that your investment aligns with your risk tolerance levels.
5. Asset allocation
Asset allocation is an essential step in investment planning. You diversify your portfolio by distributing your funds across asset classes like equity and debt and various sectors like pharmaceuticals and banks. This helps minimize the risk and maximize the returns. Depending on your risk appetite, you can shift the percentage of investment across classes and sectors.
6. Evaluate the fundamentals
Whether you invest in equities or mutual funds, assessing the fundamentals is crucial. Before investing in equities, you must conduct a fundamental and technical company analysis. This will help you understand the intrinsic value of the company and the market trends. When investing in mutual fund schemes, evaluate their historical performance, the Fund Manager’s experience, and the credibility of the mutual fund house.
7. Evaluate the costs
Investing in equities involves brokerage costs. Based on your trading patterns, the transaction cost can even exceed the profits you earn on your trades. When investing in mutual funds, you must watch for the expense ratio, which covers various expenses associated with the fund, transaction fees charged by the brokerage platform, exit load, and other charges.
8. Understand the tax implications
While making an investment decision, you must be aware of the associated tax implications and tax benefits. This will help you reap maximum benefits from your investments. Two types of taxes apply to investment gains – Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG).
In mutual funds, the capital gains taxation rate (STCG and LTCG) depends on the type of mutual fund and its holding period. The following is a summary of the same:
| Type of Mutual Fund | Holding Period for Short-Term Capital Gain (STCG) | Tax Liability | Holding Period for Long-Term Capital Gain (LTCG) | Tax Liability |
| Equity or Hybrid Equity-Oriented Mutual Fund | Less than 12 months | 15% + cess + surcharge | 12 months or longer | Tax on gains exceeding ₹1 lakh is 10% + cess + surcharge. The benefit of indexation does not apply to the seller. |
| Debt or Hybrid Debt-Oriented Mutual Fund | Less than 36 months | As per the tax slab of the investor,* | 36 months or longer | As per the tax slab of the investor,* |
Note:
- *The tax implication for debt funds is as per the amended income tax laws for FY2023-24 and is applicable for redemptions on investments made on or after 11 April 2023. Indexation benefit is not applicable.
- Redemptions on investments made till 31 March 2023 will be taxed according to the mutual fund scheme holding period. If the holding period of the specific debt mutual fund is less than or equal to 36 months, it will be taxed at the income tax slabs applicable to your income. If the holding period exceeds 36 months from the investment date, it will be taxed at 20% along with indexation benefit.
If you invest in equities or stocks, the tax implication based on the holding period is as follows:
| Type of Investment | Holding period for Short-Term Capital Gain (STCG) | Tax Liability | Holding Period for Long-term Capital Gain (LTCG) | Tax Liability |
| Equities / Stocks | Less than 12 months | Taxed at 15% + cess + surcharge | 12 months or longer | Tax on gains exceeding ₹1 lakh is 10% + cess+ surcharge. The benefit of indexation does not apply to the seller. |
Mutual funds and equity investing come with their sets of merits and drawbacks. Mutual funds offer the benefits of professional management, affordability, and portfolio diversification. Equity investing offers the benefits of having control, ownership, and the potential to earn high returns over the long term.
As an investor, you can emerge victorious in this timeless debate of mutual fund v/s equity investing by developing an investment strategy that aligns with your goals, current financial situation, and risk appetite.
FAQs
Can I make investments in mutual funds for the short term?
Yes, you can invest in mutual funds for the short-term or long-term. This depends on your investment goals and liquidity requirements. Like liquid funds, mutual funds have a short maturity period of 91 days or less. Ultra short-term bond funds come with a 3-6 months maturity period.
What are the different modes of investing in a mutual fund?
You can invest in a mutual fund through either of these modes:
· Systematic investment plan (SIP)
· Lump sum investment plan
· Systematic transfer plan (STP)Is it better to invest in mutual funds or equities?
Both mutual funds and equities are equally attractive investment avenues. You can invest in either combination depending on your risk appetite, financial situation, investment time horizon, and investment goals.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.