Mutual funds have an edge over stocks for majority of investors and so it is important to understand the advantage mutual fund have over direct investment in stock.
There is no golden rule that “Mutual Funds Are Better Than Stocks” but for majority of investors you can safely say that “Mutual Funds Are Better Than Stocks” and so let us discuss more on this today. Before I begin let me make it very clear that investing in mutual fund is no difference than investing in stocks and if share market crashes today then mutual funds would also crash and the crash in funds may be more than some individual stocks.
First let me explain the concept of mutual fund in a very simple possible language.
Mutual fund is a pool of money contributed to by investors of various type and sizes. There will be a fund manager hired to invest this accumulated cash with a goal of this fund manager is to maximize return with minimalistic risks. To do this funds are primarily composed of variety of stocks but depending on the type of fund it may also include debt and other fixed income part to maximize return with minimize risks.
Mutual funds have an edge over stocks for majority of investors and so it is important to understand the advantage mutual fund have over direct investment in stock.
- Less Volatile – Mutual funds by its nature is bound to be less volatile because it is not an investment into a single company or management. This actually means that mutual funds do not have sharp movement on either side (Up or Down) like movement in any individual stock or sector.
- Diversification – Experienced investors will agree that keeping all egg in one basket is never a good option and if you can you should diversify your income potential. In mutual funds as you are not investing in any particular stock or company. Sharp movement of a volatile stock is counter balanced by other stock giving you low beta movement of your investments.
- Tax Benefits – It becomes difficult to remain invested in one particular stock for a period of one year and more and so for gains made on returns, you need to pay capital gain tax. But for mutual funds remaining invested for one year is fairly simple and so you can save on your capital gain tax. After New Direct Tax Code this will change.
- ELSS Funds – You have equity linked ELSS funds where you can save tax and still get the advantages of investing in equity market but you have nothing for investing in stocks and yet save tax.
- Managed by experts – Funds are managed by fund managers with years of experience and so they have higher chances of selecting the right stock at the right time and at the right price which may not be possible for every one of us.
- Systematic Investments – One of the biggest advantages of investing in Mutual Funds is, you have an option to invest small amounts over an elongated period of time. Check out the Benefits of SIP or systematic investment plan.
Mutual funds are not all glittering gold and they also come with disadvantages
- No trading possible – If you are not only an investor but also looking for some trading activity mutual funds is not for you.
- Fees of Fund Managers – Fund managers with years of experience come at a price and knowingly or unknowingly you are paying the price from your returns.
Over to you
Share your views and opinion in comments below.
Buying good company shares on every fall of market and accumulating them in gradual process is better than the M.F. One should not forget that his investments should be pipe lined in multiple sectors equity shares especially banking, infrastructure, consumer durable, medicines, I.T., engineering etc. Thus investing in shares are always better choice I think so.
Multiple sectors is sign of uncertainty and I would prefer to invest in stocks where I am certain they are in right kind of business. When doing technical analysis, I invests in chart patterns and not in businesses.
All are good when Luck is good. Invest in M.F always for long time prospect but try to encash some profits time to time.
Leaving everything to luck cannot help and is a sign of weak investor.
Most investors normally end like bulls in a china shop; when investing in m.f and /or shares.
The starting point should be the consideration of age/ risk appetite/profile/ holding period and the Goal.Than comes the Long term and short term investment horizon.Thereafter; zero down on the best available and the analytics, alongwith a contingency plan.
With all that in place and after assessing the Litmus test of SECURITY/Liquidity and Return; one can do the choices of M.F. and shares.
The bottom line is that cash flow is the fundamental thing between the ages of 20 and 55 and after 60 ; one should be rich, prosperous and healthy!!!Views and comments are welcome.
Excellent posts. Informative for Normal investors
Happy investing!
Salil Dhawan
http://www.investment-mantra.in
Hello Shabbir,
Nice to see your blog! Quite useful information here, I am also in the same field as you are! I am doing web development using PHP!! But of course your doing far better stuff than me as I read on your profile.
Question, I want to invest 30000/Rs in MF. Which is better way to do? lumpsump Or SIP? As it’s already November, and I want to get all 30K tax benefit..
Also how dividends are calculated? Say I open HDFC TAX Saver MF SIP of 7000 per month, considering next 4 months in current financial year it’s 32000/Rs.. and guess I have 100 Units with this 32K invested, Would I get dividends declared by HDFC on this 100 Unit?
Or Would I need to invest 30000/Rs as lumpsump to get dividend benefit?
And considering 3 years SIP, when I will get my money back? say I start 3 years SIP 1 January, 2011, when I will get my all money back invested in 3 years, on 1 Jan, 2014??
Thanks in advance for you help.
Warm Regards,
Sajal
Thanks Sajal and I visited your blog as well.
10k Per month SIP or if you can split it into 5k per month in 2 funds few days apart.
Yes Dividend is based on units.
No for SIP each amount has the locking of 3 years and so after each sip 3 years will be calculated.
Thanks shabbir!
But just confused about my question! Let’s say I start 5000/INR sip for next 6 months, considering 4 months in this financial year, I would invest 20000/- I would get dividend for the units = 20K?
I mean dividend is declared in March-End? Or there are different months for different MF comapanies to declare dividend?
And what do you think about “Sundram Capital Protection Oriented Fund”?
Thanks,
Sajal
Dividends are declared at will and not always in March Ends. See here when funds declare dividend.
Yes all you invest in this fiscal comes under this fiscal and dividend is calculated on the day you are having number of units.
Dear Sir,
Today fortunately, first time I came to your website and reading your article, I’ve come to conclusion that you are great. Cause sir, you explain financial or would say commerce field term in easy language which is really not easy to understand for me ever before.
I am investing in mutual funds because I feel risky to invest in direct stocks as I cannot focus daily on stocks. But after reading your article I have known the types of the different type of mutual funds.
Thanks.
Regards,
Anup R. Ambuja.
Thanks. You have any idea about any banks of financial institutions that offer this facility free?
Hello Shabir,
I visit your websites regularly and enjoyed reading them well.
Recently, my banker (HDFC Bank) offered me a single point MF transaction facility where I can do selling, buying and switching of different Mutual funds online without any hassle of visiting each AMCs.
In fact, it is very convenient becuase it saves lots of time, efforts and money too- for traveling between each AMCs.
I am here to ask you:
Do you have any idea any other banks ( Preferably smaller players) or financial institutions that offers similar kind of services? HDFC charges a fee for this service. I heard some banks offers this service free of charge but I really do not know which banks offers that.
Please let me know if you have any idea about it.
Regards
Salm
Salm, I was also offered the same but HDFC charges some quarterly and check that out as well.
Mutual funds gains attention because of diversification. Instead an individual could try out for Diversification as it is not a rocket science.
In reply to the Comment by deepa:
If you wondering about taxes you may consider going with ETFs (Exchange Traded Funds) – they are more tax efficient.
The problem is to find good funds that would beat at least the S&P 500 index. As a rule “investments advisers” from the banks do not provide the best solution – they mostly trying to sell what give them better commissions.
If you do not have to go into deep analysis of the stock market and you are looking for long-term investments, you may go into mutual funds.
Thanks for the post, great info as always.
A nice article. Definitely Mutual funds are better for investors as the risk is lower in Mutual Funds as against stocks. Second thing is you get professional advice.
To read more on investment related information visit – investmentbazar.com, an investment information provider.
respected sir,
i am request u to tell me samething about the impact of tax polocies on mutual fund selection.if possible so pls. send me any research paper on it.
thanks n regards
ms.deepa upadhyay
assistant proffesor
Deepa, I am not sure what you are asking for?
i do agree by your statement.