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What is a better alternative between the stock market and mutual funds?

Dhirendra Kumar explains why you shouldn't compare the returns generated by both

I have been investing in Axis Midcap, Axis Bluechip, and Mirae Asset Tax Saver for the last 1-2 years and am quite satisfied with the returns. But I see, direct shares of some companies have also returned around 100-200 per cent. So, where should one invest for better returns - mutual funds or direct equity shares?
- Prashant

All these three funds are good and combined make a reasonable portfolio. However, I would still prefer you to invest in only one fund of Axis and choose any other fund house for the third fund. This will provide better diversification and reduce risk. If you have invested equally in all three funds, two-third of your money is entrusted to Axis. God forbid if something goes wrong with the fund house, it will impact two-thirds of your money.

You should not compare the mutual fund returns with the return generated by shares of any particular company. If you are comparing the performance of your fund, compare it with a similar index. For example, compare the performance of your midcap fund with the midcap index.

It is important to diversify your portfolio, and one should not invest in shares of just one or two companies. To diversify properly, one needs to invest in at least 10-20 companies. By doing so, the return moderates, but the risk also reduces. One cannot select a company which will give a return of 200 per cent for sure. Besides, a company offering a 200 per cent return may also fall by 60-70 per cent or more. This can be very unnerving for a retail investor. So all these things are taken care of in a mutual fund as it invests in a diversified portfolio and not in shares of just one or two companies.

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