Mutual funds or direct Equity Investment – Which is Better?

I recently met my colleague Ravi (name changed), an equity investor. He was very excited and said "Abhishek Bhai 😄 I made a good profit of ~150% in last 6 months from Sugar stock which we had purchased in dividend investing portfolio". These discussions are very common between equity investors. When you hear such conversations within your friend circle you too get excited for direct equity investing.

Should you get excited and do Direct Equity Investment ?

Few years back when I had met Ravi, he was very excited about a Company (wind turbine company). Instead of doing research on company, he was betting on news around future of non-conventional sources of energy. He had invested good sum of money with average prices of ~Rs. 20 and was expecting to double it in a year or two. Based on my research, I advised Ravi to book profit in the script around then prevailing market price of share (Rs.22 i.e. 10% profit on holding price) and to use the proceeds to invest in other better opportunity available.

He was convinced with my advice and booked profit on 50% of his holding. But based on market gossips and projections by business news channels retained balance 50% holding in anticipation of better prospects . Now, he is repenting for not implementing my advice completely. The said script is currently trading at 60% below his holding price.

 

Like Ravi, many of us accumulate loss making scripts in our portfolio. I have discussed in my previous post,  Common mistakes in stock market - Traders & Beginners mistakes you should avoid in equities. There are many researches made on this topic, linked below is one in Indian Context: Why retail investors don't make money when investing directly in equity?

In above scenario, if Ravi would have invested in Mutual Funds / Index funds instead of Wind turbine company directly he would have made much better returns. Also, his present net loss is excluding risk free returns he could have generated from fixed investments.

So, Should You Invest in Direct Mutual Funds ?

You can check my previous post of Mutual Funds: Mutual Fund Sahi Hai? and How to select best mutual fund? to get insights on Mutual Funds and its selection.

My personal observation is retail investor (know nothing investor) can easily make more money in Mutual Funds over Equity in long term. 

Why Mutual Funds are better than Equity?

1. Risk of Loss is Low: In case of direct equity or stock investment risk of loss is very high. Some shares go down by 50% within few trading sessions, never to recover. Whereas, due to diversification in Mutual funds portfolio these losses get adjusted in its NAV.
2. Time Spend of Research: A lot of time needs to be spent on research of a stock. Sometime you might even loss opportunity of buying them at right price due to incomplete research. In Mutual funds, fund managers do this research for you. 
3. Stress and Anxiety: I find most of the time stress and anxiety overtake equity investors leading to irrational decisions. Being a Stressfree Investor, I personally invest when odds are in my favours. It might take time to learn but, once you learn it your life is set. 
4. Patience: Main problem with equity investing is patience. It easy be invest like Warren Buffet to certain extend but, holding on to investment like him is near to impossible for most.
5. Fund Size: In equity investing capital required is high as compared to Mutual Funds. Small profit booking in equity can lead to high brokerage and taxes.

Conclusion 

 Health is Wealth. Your investment philosophy and planning should be simple and flexible.

In present dynamic and disruptive world, equity investment is becoming very complex. Situation is such, even fund managers aren't able to beat market. Future is all about having a right combination of Equity, Mutual funds and Index funds /  Index ETF within equity as asset class.