Why is direct equity investment better than a mutual fund?
Two options are available to investors related to an equity investment: direct equity and mutual funds. Mutual funds are more popular as they are marketed in India (TV commercials). As a result, investors tend to invest via mutual funds. There is no denying that mutual funds were good options to invest in equity until recently. However, now investors have an option to invest in the stock market directly and earn better returns. This article is of utmost importance for mutual fund investors who believe that mutual fund is the only investment option.
Why do investors prefer mutual funds?
Below are two main reasons investors tend to take the mutual fund route:
- Professionally managed funds: Most investors in India lack financial knowledge. Hence they cannot invest in direct equity as it requires expertise.
- Diversification: Mutual funds automatically diversify your portfolio. You can have stocks for each possible category if you invest in three mutual funds.
We did a small survey that showed that investors prefer to invest in a mutual fund.
We also tried to analyze what stops them from equity investment. The number one reason is the lack of time to track and monitor the portfolio.
Here is a point to ponder: We invest our money in the market to get high returns. No doubt, there has to be a balance between risk and return. Why would you not invest in direct equity and get more returns on your investments if presented with an opportunity? Today, we discuss that opportunity with you – backed by numbers.
Why should you invest in direct equity?
Below are some reasons why every investor should invest in direct equity:
Control over your investments: When you invest in direct equity, you can create a portfolio of your choice. Depending on your risk profile, you have an asset allocation. You only have categories to choose from and cannot personalize when you invest via a mutual fund. With direct equity, you can pick stocks of your choice. If you are from an IT background, you will have a good understanding of the sector and can make better investment decisions than most people.
Buy and sell at a price of your choice: When it comes to direct equity, you can buy and sell shares at any time during the trading window. However, with mutual funds, you get the NAV value calculated at the end of the trading day. Some days, during the trading window, the market (or specific stocks) is down considerably, and you can invest at a lower price. If they correct it later, you make gains.
You can take advantage of market movement: There are situations where certain news impacts a market and allow investors to buy (or traders to trade). For example, if there is news in favor of the NBFCs sector, it is expected that NBFC shares will rise in the coming days (or that day). You can take the position in the NBFC stock of your choice and make the most of the news.
Dividend Income: Most profitable companies give out dividends to their shareholders. Direct equity investment opens an opportunity for investors to earn additional income from their investments. The amount can be reinvested in the market or used for other expenses.
Ownership in company: When you invest in a company, you own a part of the company. Being a shareholder, you become part of the company’s growth story. For example, if the company grows in revenue from X to 10X, the same would translate to the stock price. It will also be reflected in the capital you have invested in the company. Direct equity investment gives you the opportunity to make multibagger returns.
Things to keep in mind while investing in equity shares
Below are points to keep in mind before you start direct equity investment:
- Yes, you will get higher returns than mutual funds, but it is a journey – you won’t be making multibagger returns overnight. Patience is the key.
- Returns on investment will vary. If you have ten stocks, some will offer you good returns, while others may remain in red for months/years. You should be prepared for such a situation and not panic and sell your holding.
- Don’t invest in direct equity if your investment horizon is small (less than a year). By staying invested for a long, you reduce your portfolio risk.
Direct Equity Investment: Risk and solution
There is no denying that direct equity investment is risky, and as highlighted above, most investors lack the financial knowledge to invest in it. You cannot jump in a river even if you know that there is gold in the riverbed if you don’t know swimming. It will be foolish, and only a greedy person may do it to regret it later.
However, if you can take help externally – someone who can take you down as a guide and help you take the gold out – then it will be foolish if you don’t opt for this option.
Jarvis Invest is your guide to investing in the stock market and earning more returns. If you lack market knowledge or don’t have the time to monitor your portfolio, you can still invest in direct stocks. Jarvis takes care of everything related to your portfolio – stock selection, monitoring, and rebalancing.
In the same survey, we found that investors want to invest in direct equity if given a chance.
However, at the same time, more than 50% have never attempted to look for an option that allows them to invest in direct equity and make higher returns.
Do check out Jarvis Invest and start your direct equity investment journey. Share with others and let me know that a platform exists where with least effort, you can still invest in direct equity.