Lately, many individuals have started looking toward stock markets to earn money and create an additional source of income.
This has been the trend for the last two years, at least when the lockdowns made people realise the need to diversify their income sources to
through a crisis.
As investors hop on to stock markets, they most frequently wrestle with the million-dollar question, “Should I invest simply in stocks or look at mutual funds?
Mutual funds and stock portfolios are both types of investments, but each takes a different strategy. Potential investors need to be aware of distinctions and the steps involved in investing in them. This will help them to make a better decision.
The cost associated when you invest via mutual funds is the fund’s expense ratio, which is charged annually. Direct mutual funds have lower expense ratios than regular mutual funds.
A high expense ratio is justified only when the mutual fund scheme provides high-risk-adjusted returns. A high expense ratio for a poor-performing scheme will reduce the already modest returns.
The cost associated with investing and forming a well-curated stock portfolio is the brokerage, securities transaction tax, SEBI turnover fees, and stamp duty.
The brokerage charge depends on various brokers. From the cost viewpoint, owning a well-curated portfolio can be economical.
Also, various SEBI registered investment advisors provide readymade, well-curated stock portfolios for a flat fee, where investors can invest via brokers of their choice.
If your investment amount is high, opting for a flat fee model would be beneficial as the fee remains the same irrespective of the amount you invest.
The stock markets assume that investors are rational and will always make their best decisions. However, this is not always the case. Panic in times of market crisis and several human biases can come into play.
There is a lesser possibility of behavioural biases affecting investment decisions as the fund managers managing mutual funds have years of experience and have weathered through several market cycles.
This is more of a problem with respect to direct stock investing. But investors can mitigate this problem if they subscribe to well-researched stock portfolios offered by investment advisors and do not indulge in individual stock picking if they do not have the necessary time and resources.
With respect to diversification, both a mutual fund portfolio and a stock portfolio stand well. However, a stock portfolio will have a maximum of 15-20 stocks, which is an ideal diversification.
Regarding mutual funds, some funds, especially passive funds tracking an index, may have 100-150 stocks in the portfolio, leading to over-diversification and suboptimal returns. Concerning this factor, a stock portfolio may fare better.
Regarding the minimum investment amount required, mutual funds are a clear winner. This is because you can start investing in mutual funds at a very low amount.
Whereas with respect to a stock portfolio, the minimum investment you will have to make is the summation of the share prices of different shares you want to buy!
This creates no doubt that investing in mutual funds is more feasible for investors. But lately, many stock portfolios have emerged on Smallcase, where investors can start investing with low investment amounts.
Exploiting Short-Term Market Opportunities
This is an important yet underlooked feature by investors. Exploiting short-term market opportunities is much easier when you own a stock portfolio rather than invest in a mutual fund.
For a mutual fund scheme, the massive AUM will make it impossible for the fund manager to react to a short-term market opportunity as it will lead to huge transaction costs, which can offset the gains.
Also, if a fund manager tries to do so, the outbreak of the news in the market might lead to front running, further increasing transaction costs.
Also, mutual funds can’t take positions in illiquid small-cap securities, although they might know that it is available cheap.
Mutual funds and curated stock portfolios are both a great way to invest in the market. One has to be mindful about what option they want to go ahead with, depending on their investment style. Mutual funds are good for someone looking for a passive investment style.
At the same time, curated stock portfolios are the right option for someone looking to invest in the stock market directly but with professional guidance.
(The author is Founder, TejiMandi)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)