Here’s an interesting fact about India.
Compared to other countries, individual investors in India hold more stocks in their name, than they hold.
Only about 3% of the total market cap in India is held through, whereas direct holding by individuals is nearly 22% of the market (7 times more); contrary to the developed markets where individual investors tend to hold stocks primarily through .
The question for an individual is then, why buy equities through a(and land up paying annual fees of ~ 1.8% of the total ), when they can buy directly through a stockbroker (paying a one-time per trade charge).
Here are a few reasons to buy mutual fund instead of stocks
#1: You are not held back by your ability to pick and track stocks
One of the main benefit a Mutual Fund provides is that you don’t have to pick stocks. Picking stocks, tracking them, making sector and , buying and selling stocks when required, are all best done by a professional .
We have seen several individuals who bring up their oldfor review. The older , say more than 15 years old, have more than 60% of stocks that are completely defunct today. Such defunct companies drag overall returns even though the other stocks may have done well. Recently, I saw a that is a 60 year old and not even one company exists today.
In a, you can avoid such situations completely. It’s managed by a professional who’ll ensure your contains good stocks with potential for long term returns.
#2: Zerotax for short-term profit booking by the
When an individual manages aof stocks, there will most likely be some selling and buying. If the selling of stocks is done within one year of purchase, there is an incidence of short term tax.
Whereas for a, there is no tax, even if it were to book short term for the fund he manages. This will trickle down as benefits for you as an investor in that fund.
That being said, if you invest Rs 10,000 in a particularand after 3 months, the value becomes Rs 12,000 and you withdraw the entire amount, you are liable to pay tax on the Rs 2,000 profit. Only after a year does withdrawal from not attract any tax.
#3: Lower cost associated with investing
The fund, being large, will be able to benefit from economies of scale. It can negotiate better with intermediaries, and therefore lead to lower overall costs.
For e.g. if you were to open a share, you’ll probably end up paying 0.5%-1% of the trade as commission to the brokerage. However, due to the scale have, they’ll end up paying much less than that. This benefit will indirectly be passed to you as a investor.
SEBI, the market regulator, has made it compulsory for theto include all associated costs. Look out for the of funds to understand the cost of investing. This is a % value that tells you how much the charges you as fund management fee.
Expense ratio is typically around 1.8% for actively managed.
#4: Instant diversification of yourwith a few thousand rupees
Typically, in order to have a well balanced, you would need to have about 25-30 stocks in your . This can lead to a good mix of performance and stability.
Such a basket approach can be achieved if you have a large enough corpus. As an individual, you may not have sufficient funds or mental bandwidth to create a sufficiently diversifiedof stocks.
provide instant diversification. Since you are buying units of the that are spread across several stocks, you receive diversification benefit without investing a huge corpus.
#5: More time to do what you love
You may be expert in your own field. For example, you may be a great programmer or a sales person. Stick with your area of expertise, and what you love doing. You will probably end up earning more, if you stick with what you love doing.
Leave investing to specialists, who know and love what they do.
More time at your disposal also means you get to do more of what you love to do the most outside of work- like taking a vacation or spending time with your family.
#6:investing is simply more convenient
With stocks, you have to open aand a share , do complex analysis on companies and sectors to understand which stock to buy, know when to sell stocks, pay commission on each trade you make, and more.
When ais managed, a custodian will handle all settlements and safety of . It is the job of the custodian to ensure settlements happen safely and investor are secured. It’s also a tightly regulated industry.
Everything gets done for you for a very small make it even easier to invest in mutual funds by doing fund selection, annual review, automated investments and more for you, completely online.. Online platforms like Scripbox
All these being said, we are not saying you should never directly invest in stocks. Direct stock investing can be profitable and worthwhile if you
- Are willing to spend time analysing and tracking companies and sectors regularly
- Can handle volatility on a more frequent basis
- Understand tax implications of your trade, especially if you do volume trading
- Have enough money to invest in building a diversified of stocks
For someone who wants their money to grow safely, generating inflation-beating returns, and not having to worry too much about where and when to invest, aoffers a good alternative.
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