Investors often wish to know whether there is a difference between investing through the Mutual Funds and directly purchasing shares in the market. At the onset let me clarify that both options are different vehicles to reach the same destination ie. Successful investing in equity markets. Both options are subject to the risk of investing in equity markets and the returns achieved in both cases are subject to the performance of underlying stock markets. The vehicle that you select is largely dependent on your ability to evaluate various investment options, your risk appetite and the time that you will devote to this activity.

When you buy stock in a company, you become a shareholder. There are two types of stocks: common and preference. If you are a shareholder of common stocks, you are entitled to vote in for the directors of a company, and entitled to receive dividends on your shares (if the company pays dividends). If you are a shareholder of preferred stocks, usually you do not have voting rights, but you receive a fixed dividend and are paid before common shareholders. There are two ways for direct participation in equity markets, 1) applying for the equity shares of the company through Initial Public Offerings and 2) buying the shares from exchange platform through a broker. Only equity shares are listed on stock exchanges. Preference shares are generally not listed on the stock exchanges.

A mutual fund is a professionally managed pool of money from investors with similar investment objectives. A mutual fund represents many individual stocks from a variety of industries and is managed by a fund manager. Mutual funds offer diversification and professional management of your money. As an investor in a mutual fund, you are buying a unit of the fund. For mutual fund investment there are, as in direct stock participation, two ways to purchase, 1) While buying units from the New Funds Offerings and 2) buying from the existing funds on its price based on its Net Asset Value (NAVs). The NAV is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. The NAVs are declared on daily basis.

All investment decisions require that a view be taken on the market or a group of stocks or a sector. This basic responsibility cannot be passed on to the Mutual fund manager. It is this decision that helps you to shortlist the schemes of various mutual funds that you will invest in or the shares that you wish to directly purchase from the market. If you think tech sector will do well you may look at a tech fund, if you think IPO market is booming then IPO funds are available or you may apply directly to the IPO by filling the application form for each issue. If you think generally positive about the market then you would look at the index fund or buy index stocks. The mutual fund manager does the ultimate selection of stocks and monitors their performance and enters and exits at appropriate time. Since the broad scheme is defined there is not much scope for fund manager to deviate from the investment objectives that you have in mind.

The largest plus of investing in mutual funds is the Systemic Income Plan (SIP). Systematic Investment Plan is a simple yet powerful tool used by investors worldwide as a method for savings and wealth accumulation. Investing through SIP facility will empower you to plan and save for your future by inculcating in you a disciplined habit of investing that should bring you closer to achieving your financial objectives. It works much the same way as a recurring deposit account, periodically; you invest a fixed sum of money into a specific investment scheme, for a pre-determined number of months. The minimum amount can be as small as Rs.500 and the frequency of investment is usually monthly or quarterly. This simple programme has a number of advantages. The power of compounding can do wonders.

In due course of time, a small amount can grow into a significant amount. More importantly, an SIP does away with the need or effort to time the market. And this is where SIP fits in. By the process of regular investing one gets to invest in the highs as well as the lows, and this helps in averaging out the volatility in the market.
One must also consider costs involved in transactions. For the benefit investors, I have prepared a small list of information one must consider before investing into the market.

Direct Stock Purchase Mutual Fund
Primary Participation Initial Public Offer (IPO) New Fund Offer (NFO)
Secondary Participation Stock Exchange Mutual Fund Advisors
Asset Class Equity Shares Units of Fund
Various Cost Involved
Brokerage at the entry 0.25 to 0.50 % of transaction value Known as entry load – 2 to 2.5% of amount invested
Brokerage at the exit 0.25 to 0.50% of transaction value Known as exit load – 1 to 2.25% of amount invested
Other Costs
Service Tax 12%
Securities Transaction Tax 0.015% of the transaction value
Demat Charges Rs. 10 to 12 per transaction
Dividend Tax Free Tax Free

Average one month return for the mutual fund schemes (investing in NSE Nifty) companies is 5.27%, whereas the Nifty index has gained 5.62% during past one month. Average return over one year is 44.30% while Nifty has yielded a return of about 49% during the similar period. So, mutual fund investment is lower compared to direct market return. Lower returns in mutual funds are due to the costs incurred for managing the mutual fund or performance of the fund manager. You have to benchmark your skills against index returns while you directly invest. You may do better then the fund manager and market or worse then both.

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