3 reasons an equity mutual fund trumps over buying stocks

By Morningstar |  14-09-16 | 
 

Most people are fairly unanimous on the fact that from all investment opportunities, stocks offer the most potential for growth. Despite ups and downs in the market, stocks historically have always earned more than fixed return instruments over the long term. Moreover, it is one asset that fire proofs savings against inflation.

However, not everyone is a stock picker. Benjamin Graham, also known as the father of value investing, once remarked that making money depends on the “amount of intelligent effort the investor is willing and able to bring to bear on his task”. Intelligent effort refers to the intensive research, capability, and time that an individual has to put into stock analysis.

Besides, one would also require a significant outlay of cash. Without it, a highly concentrated portfolio of a few stocks puts you at a great risk.

In the light of the above issues, it makes sense for investors to opt for an equity fund from a reputed fund house. The investment decisions are left to an asset manager and his team of analysts. And one instantly gets a well-diversified portfolio.

Besides being a logical decision, here are three reasons an equity fund makes sense. 

  • Huge opportunity

There are thousands of funds from 40 asset management companies, or AMCs, that are available to the retail investor. So there is no dearth of options.

Within equity, the choices abound. You can opt for a growth fund or a value fund, or a fund that combines both investing styles. Alternatively, one can pick a fund based on its exposure to various market capitalizations. There are funds classified on the basis of sectors or themes, such as auto, infrastructure, FMCG, and pharma. There are international funds too that offer a global exposure to a portfolio.

Besides equity, there are also debt funds and gold funds and hybrid funds that combine asset classes. So one can diversify their entire portfolio and conduct their asset allocation by resorting to mutual funds.

Within these funds, one can stick with the growth option or opt for periodic payments by taking the dividend option.

However, be wise and pick up funds which have a good track record and where the fund house boasts of a good pedigree.

  • Entry and exit is convenient

By investing just a tiny amount, you get a ready-made, well-diversified portfolio. Let’s say you start a monthly systematic investment plan, or SIP, in a diversified equity fund. By investing as little as Rs 1,000/month, you instantly get a portfolio of at least 40 stocks across numerous sectors.

The selection is made by the fund manager who will invest after conducting his research on which sector and individual stocks to invest in.

Once you put an SIP in place, the amount that you decide to invest will automatically be deducted from your bank account and invested at the date pre-selected by you. With no effort on your part, your savings will be channelised into the fund of your choice.

To redeem your investments, you will have to fill up a redemption form. If you submit it before 3pm, the net asset value, or NAV, of that working day is applicable. Post that time, the units will be redeemed at the NAV of the next working day.

Once the redemption request is successfully received and verified, it takes anywhere from 2 to 4 working days for the proceeds to be credited to the registered bank account.

Open-ended schemes can be redeemed anytime. If you want to sell your units in a close-ended fund before the tenure of the fund has been completed, you will have to sell them on the stock exchange, where liquidity is an issue. Some close-ended funds offer a redemption window periodically.

  • No tax on buying and selling stocks

If you are managing a stock portfolio, you will have to pay brokerage on your transactions. In an equity fund, an investor will be charged an expense ratio, which averages 2.5% of the assets of the fund. Do note, the NAV declared is post deduction of expense.

However, besides brokerage, if the selling of stocks is done within one year of purchase, then you are liable to pay short-term capital gains tax.

A fund manager has no such restrictions. There is no capital gains tax for an asset manager even if he were to book short-term capital gains for his stock transactions. So should he churn his portfolio rapidly over a few months he will still not be liable to pay the tax, as in the case of a retail investor.

An investor in an equity fund is taxed on short-term capital gains but pays zero long-term capital gains tax. Having said that, investors in any equity product are advised to hold on to their investments for a couple of years at the very least.

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Shawn Signal
Nov 21 2016 05:54 PM
I completely agree with you. Investing in equity is much safer than stock market but it's a slow process while in stocks you can get double overnight. It has some risks as well but they are worth taking.

I invested in google in 2013 and my money is 3 times now. The stock market made me rich. but this google investment was a noob move. Now I have invested in more than 30 companies and all are going in profit and do you know how I made this all happen. I was done ith the help of stock market signals.

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LOGANATHAN SHANMUGAM
Sep 14 2016 10:43 PM
the article contains all the informations in a nutshell. Everyone can easily understand why should invest in mutual funds insteads of in stocks. It also dicussed the various options in mutual funds and redemtion method. A very good useful article for the new investors in mutual funds.
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