Stocks vs Mutual Fund investing

Many-a-times we are often stuck at making big or small decisions. It could be something as life defining as what should I become? – A doctor or an engineer? Or something as trivial as which dessert should I binge on? – A cake or a gulab jamun? Or one of the most important decisions of them all as to where do I invest my money – Stock markets? Bank FDs? Gold? or somewhere else?
When it comes to stocks which one should you pick up? An IT or Pharma or Automobile, or which stocks particularly? To avoid this confusion, Mutual Funds come to your rescue!

What is a Mutual Fund?

A Mutual fund is a vehicle to mobilize money from investors, to invest in different markets and securities, in line with the investment objectives agreed upon between the mutual fund and the investors. There are several avenues in which all mutual funds invest – like equities or the stock markets, fixed income or the debt markets, gold etc. If you look at investing in stocks, the mutual fund route (equity mutual funds) makes your task more convenient, as all you have to do is to invest in a scheme and leave the rest to the fund manager. Fund Managers are experienced and skilled professionals, who conduct investment research and analyze the performance and prospects of various instruments before selecting a particular investment. Thus, by investing in mutual funds, you can avail of the services of professional fund managers, which would otherwise be costly for an individual investor.

What people will tell you, and they are right when they say it, is that if you have the time, the resources, the knowledge and the expertise to invest in equities yourself then do so. But if you don’t have, in adequate measure, even one of the above then you may rely on a professional fund manager to take care of your investments.

Therefore if you have chosen to invest in equities through mutual funds, it is probably time for you to decide which scheme you need to purchase.

So let us help you solve this dilemma by telling you about the types of Equity funds there are in the equity market and what they do. We hope that this may help you reach your investment decision.
There are six broad categories of Equity Funds –

1. Diversified Equity Funds – Diversified equity fund is a category of funds that invest in a diverse mix of securities that cut across sectors. So you will essentially have a ‘mixed bag’ of stocks that cut across all sectors that make up the market.
2. Sector Funds – Sector funds invest in only a specific sector e.g. pharma, automobile, FMCG etc
3. Thematic Funds – Thematic funds invest in line with an investment theme. The investment is more broad-based than a sector fund; but narrower than a diversified equity fund. E.g. infrastructure which could include cement, steel stocks etc. or healthcare which could include pharma, chemicals, hospitals etc.
4. Equity Linked Savings Schemes – Equity Linked Savings Schemes (ELSS) offer tax benefits to investors under section 80C.
5. Equity Income or Dividend Yield Schemes – Equity income / Dividend yield schemes invest in shares with high dividends.
6. Arbitrage Funds – Arbitrage funds take contrary positions in different markets / securities, such that the risk is neutralized, but a return is earned.
   Sector funds or thematic funds, concentrate more on specific sectors hence have the potential for higher returns if that sector does well, but the risk is also that much higher in case that sector does poorly.
   However, a diversified equity fund on other hand generally does not face these shortcomings. It invests across companies in various sectors of the economy like BFSI, Infrastructure, Telecom, IT, FMCG, etc. By diversifying investments the fund minimizes the risk of over concentration in specific sectors.

Always remember the old adage “Diversification of investment does help if done systematically considering the asset allocation and goals of an investor.”

However, investments in all mutual funds are subject to market risks. Please note that like equities – equity funds too are ‘risky’ but they have potential to create wealth out of your savings in the long term. While the risk factor is always higher with equities, one should not ignore the probability of gaining larger returns from them over a longer period of time.

We hope that this article would have helped clear any confusion on stock picking and will help you to invest in equity markets. Remember to always consult your financial advisor to help you with your investments.