Benefits of Investing in Mutual Funds Versus Directly in Shares

Mutual funds are a professionally managed investment vehicle which allows you to invest in debt instruments, real estates, gold, silver, equities and other financial instruments.

It means that mutual funds are not a form of an asset themselves but an investment mode through which you can invest in different asset classes.

You can invest in all the asset classes that mutual funds offer in different schemes all by yourself directly too. Hence, the question arises ‘Why should one opt for mutual fund investments?” or “What are the benefits of mutual fund investments?”

To answer this question, let’s take the shares listed on the stock market as an asset class for comparing direct investing to mutual funds.

Below are the 5 major benefits of investing in mutual funds versus directly in shares:

1. Diversification at the lowest possible investment amount:

Diversification means dividing your total investable capital among several shares from different companies, industries or even nations to manage the unsystematic risk in your Portfolios.

One of the most important benefits of investing in mutual funds is diversification at the lowest possible investment amount. You can start investing with as little as ₹100 in mutual fund schemes and get the diversification of several shares in your Portfolio.

Example:

Assume you wanted to invest in stocks of large-cap companies from different sectors and debt instruments to get a diversified Portfolio:

As a direct investor, you pick these 5 stocks with highest market cap in each sector and Bank FD to invest:

Illustration
Company Name	Sector	Stock Price	No. Of Shares Bought	Amount Invested
Reliance	Conglomerate	Rs. 2610	1	Rs. 2610
TCS	IT	Rs. 3385	1	Rs. 3385
HDFC Bank	Banking	Rs. 1495	1	Rs. 1495
HUL	FMCG	Rs. 2635	1	Rs. 2635
Adani Green	Energy	Rs. 2410	1	Rs. 2410
TOTAL EQUITY			5	Rs. 12,535
Bank FD	Debt			Rs. 2465
TOTAL DEBT				Rs. 2465
TOTAL INVESTMENT			5	Rs. 15000

** Stock price as on 19th August 2022

As an individual investor, you can see that the total investment required would be Rs. 15,000 to create a diversified Portfolio of large-cap stocks from different sectors and debt instruments.

However, you can get a similar diversification of large-cap stocks and debt by investing in large-cap mutual funds with as little as ₹100.

TIP: You can check the minimum investment requirement of 3 best mutual funds – Large-cap:

Illustration
Mutual Fund Scheme	Min Investment for Lumpsum	Min Investment for SIP
ICICI PRUDENTIAL BLUECHIP FUND – GROWTH	Rs. 100	Rs. 100
CANARA ROBECO BLUE CHIP EQUITY FUND - GROWTH	Rs. 5000	Rs. 1000
AXIS BLUECHIP FUND - GROWTH	Rs. 5000	Rs. 500

2. Expert Management of your Portfolios:

While investing in shares can be done directly, there are a few challenges an individual trader may face which are discussed below:

Research stocks to invest-

Research forms a crucial part of investing. It is a skill to identify the right stocks for investments using techniques like fundamental analysis and technical analysis.

Direct Investing – An individual may not have knowledge and experience of how to research stocks. Also, as an individual investor you are often prone to behavioural biases which will affect the quality of research.

Mutual funds – Mutual fund investments are managed by experienced and highly educated Fund managers and a professional team which makes it a perfect investment solution for novice investors.

Corporate action benefits –

Companies declare various corporate action benefits like bonus, buybacks, merger or demergers, dividends, rights issue, etc for the existing investors. While dividends are distributed to all investors without application, all other corporate action benefits have to be applied by filling a form and submitting to your broker, registrar, custodians or companies directly.

Direct Investing – Individual investors are often not able to track and apply for all the corporate actions benefits on their portfolio of stocks. Thus, missing these benefits.

Mutual funds – Mutual fund investments are managed by Asset Management Companies (AMCs) who hire a team of professionals to track and apply for such corporate actions.

Time constraints –

Indian stock markets work from Monday to Friday and the timings are 9 AM to 3.30 PM. You can refer to the market timings and holidays on NSE website.

Direct Investing – An individual investor would have to distribute his time across several activities like going to job, going on a vacation with family, getting a medical treatment, etc. Hence, they can not give 100% time in the market.

Mutual funds – Mutual funds are managed by a team of professionals. This guarantees that your Portfolio of stocks is monitored throughout the market hours for all market working days. It also ensures that you do not lose investment opportunities.

Administration work –

While investing in stocks, there can be several administration work involved such as generating reports for daily, weekly, monthly or yearly reporting to authorities or for self-use, coordinating with bank and broker for various applications (like corporate action applications), and for funds (like margin calls), handling legal disputes, etc.

Direct Investing – An individual investor would have to do administration work involving the investments like getting specific reports from brokers, keeping these reports safe, coordinating with bank and broker for margin calls, handling legal obligations, etc. all by themselves.

Mutual funds – A team of professionals would handle all administration work required for investment in shares.

TIP: You can evaluate the best mutual funds by checking the expense ratio which would show the efficiency of AMCs in managing the cost of professional teams and other expenses. Also, doing a bit of research on the Fund Managers – their total experience, their total tenure in managing a specific mutual fund, other mutual funds they are managing, etc. is recommended.

Expense ratios and Fund Managers of 3 best mutual funds – Large Cap:
Mutual Fund Scheme	Expense Ratio	Fund Manager Experience
ICICI PRUDENTIAL BLUECHIP FUND – GROWTH	1.69%	Anish Tawakley: Anish is a Fund Manager & Head of Research at ICICI Prudential AMC. Currently, he manages ICICI Prudential Bluechip Fund and ICICI Prudential Manufacture in India Fund. With an overall work experience of more than two decades, he has gathered an expertise in capital markets and strategic consulting. He has been associated with Barclays, McKinsey, Bernstein, Credit Suisse in various leadership positions. Anish holds a Post Graduate Diploma in Management from Indian Institute of Management, Bangalore and a B. Tech from Indian Institute of Technology, Delhi.
CANARA ROBECO BLUE CHIP EQUITY FUND - GROWTH	1.85%	Shridatta Bhandwaldar: Mr. Bhandwaldar is a BE (Mechanical) and MMS (Finance). Prior to joining Canara Robeco Mutual Fund he was associated with SBI Pension Funds Pvt. Ltd. (Jul 2012-Jun 2016) as Head-Research, Heritage India Advisory Pvt. Ltd. (Oct 2009-Jun 2012) as Senior Equity Analyst, Motilal Oswal Securities (Jan 2008-Sep 2009) and MF Global Securities (Apr 2006-Dec 2008).
AXIS BLUECHIP FUND - GROWTH	1.69%	Shreyash Devalkar: Shreyash Devalkar is the Senior Fund Manager at Axis AMC. He joined the AMC in 2016 and took over the responsibility of managing important funds like Bluechip Fund, Midcap Fund, followed by Multicap Fund in 2017. Prior to this, he was associated with BNP Paribas AMC as a Fund Manager for more than 5 years. He has also worked as a Research Analyst at IDFC Asset Management Company (July 2008 to Jan 2011) and IDFC Securities (Sept 2005 to July 2008).

Economies of Scale in Transaction cost –

While investing in shares, there are several transaction costs that have to be paid like brokerage, STT, stamp duty, turnover charges, transaction charges, DP charges and GST. These charges are generally a percent of your trade value or a flat fee.

Direct Investing – An individual investor usually trades on a small capital; hence these charges can be huge. At times, even when the investor makes a profit on a trade, they end up losing capital due to the high charges.

Mutual funds – On the other hand, mutual funds having a large pool of funds received from investors when invested in stocks receive several concessions and reduced fees. The benefits of these reduced transaction costs are passed on to the investors. Brokerage and other transaction costs generally are up to 0.12 percent of trade value in case of cash market transactions and 0.05 percent of trade value in case of derivatives transactions for equity mutual fund schemes, this is extremely cheap when compared to charges an individual investor pays.

TIP: You can evaluate the best mutual funds by checking the expense ratio which would show the total expenses including the transaction cost, you can also check the total transaction costs in the scheme documents.

Provides flexibility and liquidity in investments –

Flexibility in investments means allowing investments across several asset classes including equities. Further, investments can be done in small amounts on regular intervals (SIPs) or in a lump sum. The time horizon of your investments can be overnight, ultra-short term, short term, medium term and long term. The investment can also be lock-in or without a lock-in condition.

Direct Investing – There is hardly much flexibility of investments due to lower capital size. An individual investor will find it hard to invest in stocks, debts, gold, real estate and other asset classes all at the same time. Thus, they miss out on opportunities that can provide higher returns. At times, when an individual investor starts with multi-asset investing, he gets stuck in managing the short-term fund requirements. Also, most investors prefer not to invest in assets with lock-in or lower liquidity as having cash in hand is their utmost priority. The most popular illiquid assets that an individual investor would invest in are real estate, PPFs, NPS, etc. which are either for personal use or tax savings.

Mutual funds – Mutual fund investments offer investors the flexibility to choose assets that they wish to invest in like gold, real estate, equities, debts, etc through different schemes with minimum investment requirements starting at Rs. 100. This helps in capturing any high returns opportunities even for a small investor. There are mutual fund schemes that offer investment modes like SIPs and lump sums both so that the investors have the flexibility in managing their short-term fund needs and investments as per their financial capabilities. Mutual fund schemes provide flexibility of investments in different time horizons like overnight, ultra-short term, short term, medium term, and long term. Mutual fund schemes are available with a lock-in and no lock-in option. Since the minimum capital requirement is low for mutual funds, an individual investor can opt for lock-in schemes as well to get capital appreciation benefits.

TIP: While evaluating the best mutual funds an investor should choose among debt funds for any short-term gains and equity or other mutual funds for their long-term goals.

3 best mutual funds: Overnight debt funds
Mutual Fund Scheme	AUM	TER	1 Year Return %	3 Years Return %	5 Years Return %	Inc. Return %
SBI Overnight Fund (G)	27,383.17	0.18%	3.51%	3.58%	4.56%	6.45%
UTI-Overnight Fund (G)	8,418.76	0.12%	3.55%	3.62%	4.37%	5.90%
HDFC Overnight Fund (G)	15,889.30	0.20%	3.47%	3.53%	4.52%	5.79%

3 best mutual funds: Ultra-short Duration debt funds
ICICI Pru Ultra Short Term Fund (G)	11,229.03	0.87%	3.69%	5.38%	6.17%	7.53%
Aditya Birla SL Savings Fund – Regular (G)	14,870.94	0.51%	3.82%	5.49%	6.33%	7.42%
Kotak Savings Fund (G)	11,605.53	0.80%	3.40%	4.71%	5.74%	7.25%

3 best mutual funds: Short Duration debt funds
HDFC Short Term Debt Fund (G)	13,817.95	0.74%	2.71%	6.62%	6.88%	8.11%
ICICI Pru Short Term Fund (G)	15,543.71	1.12%	3.37%	6.64%	6.52%	7.83%
Kotak Bond – Short Term Fund (G)	13,156.19	1.16%	2.28%	5.81%	6.17%	7.39%

3 best mutual funds: ELSS (3 years lock-in for tax savings)
ICICI Pru Long Term Equity Fund – (G)	9,072.14	1.93%	5.86%	15.39%	11.50%	21.01%
HDFC Tax Saver Fund (G)	8,715.76	1.88%	12.10%	13.95%	7.84%	20.20%
Franklin India Taxshield – (G)	4,312.12	1.94%	5.66%	14.51%	9.33%	19.27%

Same reporting format across mutual funds -

While investing in stocks, you might want to research the company’s performance using their financial statements. However, this becomes a complicated task when the two companies you are trying to compare follow different reporting formats. Whereas, mutual funds across India have the same reporting format, which makes it easier for an investor to compare funds.

Conclusion:

The best mutual funds for you would be based on your need for investment (Goals), risk profile, time horizon and returns expectation, there isn’t one scheme that will be best suited for all. Hence, do not simply invest in a mutual fund scheme based on the recommendation of friends or family. You can either read the scheme documents to check scheme suitability or talk to an AMFI Registered Mutual fund advisor to guide you.