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Should one invest directly in shares or through mutual funds?

Ashutosh Gupta explains how to decide where to invest

Which investment is better in the present scenario - shares or mutual funds?
- Jayant Nagesh Banavaliker

By mutual funds, I presume you're talking about equity mutual funds because fixed income mutual funds are grossly different. Talking about direct stock investing versus investing through mutual funds, I'd say that the present scenario has nothing to do with this decision. That's because the underlying investments or holdings in either of these two approaches would still be equity stocks. The only difference is, in the case of direct stock investing, an investor himself decides which stocks to invest in, how much, and when to make that investment. While in the case of a mutual fund, an investor gives his money to a fund manager to make these decisions on his behalf.

Thus, the right question is who should invest in direct stocks versus who should consider investing in equity mutual funds. We believe that direct stock investing is for those who can dedicate a specific time commitment because direct stock investing is a much more hands-on way of investing. Hence, it requires a high degree of effort and time commitment. Also, the investor needs to have a certain degree of interest and inclination to know about businesses, to understand how businesses are run and what would make them keep growing in times to come. Moreover, the investor needs to withstand deep corrections in their stock holdings which may happen now and then. And finally, one also needs a reasonable amount of money to invest or build a reasonably diversified portfolio of at least 12-15 stocks. Otherwise, if an investor only holds three to four stocks, that could be far too concentrated. On the contrary, with a mutual fund, one can get a well-diversified portfolio of stocks even with a small investment of Rs 5000 per month.

We generally believe that equity investing requires a certain degree of skill, experience, time commitment and a good temperament which we believe comes with experience. So these are the considerations, and for that, we believe that mutual funds tend to be a preferable route for a vast majority of retail investors.

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