What’s better? Investing in Equity Mutual Funds or Directly in Stocks

12 Jan

What’s better? Investing in Equity Mutual Funds or Directly in Stocks

Investing in Equity Mutual Funds or Directly in Stocks | Mutual Funds vs Stocks

Equities have out-performed other investment asset classes over the long-term in India as well as worldwide. With rising maturity, retail Investors in India have begun to understand this and also take strides into the short-term instability of this asset class. Better rigid environment and better corporate governance have also helped bring more investors to Equities.

Currently, retail equity investment in India is frequently channeled straight in stocks. Individual investors hold around 20% of the total equity market value, even as mutual funds account for about 3%. This is roughly the opposite of global trends where retail money is typically professionally managed and mutual funds are the investment vehicle of choice for equities.

Why should India be diverse? Does direct investing give any benefit over investing in equity mutual funds?

To answer this question, we conducted a study to compare the historical performance of Indian equity funds to that of the stock market over the last 10 years. We chose 25 equity mutual funds based on size (highest assets under management) to stand for the complete equity mutual fund industry in each year. We compared the median yearly return for these funds to the yearly returns of the Nifty. Here’s what we found:

The analysis shows that
Equities in general created wealth for investors over 10 years
The return provided by both mutual funds and the market varied significantly from year to year
In each year, there were significant differences in returns between the two
Equity mutual funds outperformed the Nifty in 7 of the 10 years
The cumulative annualized return of Equity mutual funds over 10 years was significantly higher than the Nifty.

The conclusion: Equity mutual funds in India have been comparatively consistent in outperforming the broader stock market.

This not surprising.
Mutual funds are specially designed as well diversify investment portfolios. Professional money managers who make sure rigorous investment discipline to manage these funds. The fund managers are usually able to dedicate more time and resources to monitor investments, than a person could, and tend to react less to short term investor sentiment.

An interesting feature which we discovered throughout this research is that there was substantial variation in the composition of the top 25 equity mutual funds over the 10 years reviewed in our study. On average, about one fourth of the top 25 funds were replaced by new funds every year. The Indian mutual fund industry is incessantly transforming and accordingly, close monitoring and assessment of the equity mutual funds on offer is necessary to increase the chances of better performance.

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Finheal

One thought on “What’s better? Investing in Equity Mutual Funds or Directly in Stocks”

Manish Hinger - April 7, 2017 at 4:32 am

Very good article. Are mutual funds definitely better than investing directly in equity shares? If you have the necessary stock selection and portfolio management skills, you can invest directly in shares through a stock broker. Investing in shares gives you the freedom of selecting the shares you want to buy or sell, while in mutual funds, you will have to depend on the judgement of the portfolio manager. As discussed earlier, the knowledge, experience and judgement of a fund manager, is likely to be much better than that of a typical retail investor. As such, for most of the retail investors, mutual funds are more beneficial for meeting their long term financial goals.
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