Equity Vs Mutual Fund: Which Is the Better Investment Option?

Know the difference between equity and mutual funds to make the right choice.

Key Takeaways

Direct Equity and mutual funds are traditionally popular investment instruments.
Equity shares are more static, while mutual funds are dynamic and include various types.
Opportunities of portfolio diversification are higher with mutual funds, but equity shares can generate higher returns.
Besides ELSS mutual funds, you have to pay taxes on both equity shares and mutual funds.
You have more control over stock selection with equities, whereas fund managers select stocks in a mutual fund portfolio.

Equity investment and mutual fund investment both are considered result-oriented long-term investment options. However, the two differ fundamentally. Mutual funds are investments made by fund managers who pool together funds from various investors and invest in purchase stocks, bonds, and other assets, on their behalf. Conversely, an equity investment is a direct, individual investment in a company, wherein an investor purchases shares of specific companies trading on the stock exchange. These shares will eventually be traded in the stock market. In this article, we compare equity vs mutual funds.

Difference Between Equity and Mutual Funds

As an investor, you must compare the differences between mutual fund investment vs equity investment and make the investment based on several factors. These include:

The Risk-to-returns factor

Both equity stocks and mutual funds involve an element of risk. However, equity investments are substantially risky. If the companies you invest in perform well on the exchange, you stand to earn higher returns, whereas, in a bearish market, the prices of all the shares in your equity portfolio could fall at the same time. The adage ‘high risk, high returns’ was perhaps coined for equity investments.

As for mutual funds, you can spread your risk out in many ways by investing in a variety of mutual funds, per your risk appetite. Equity mutual funds can provide higher returns but carry more risks, while debt mutual funds generate relatively lower but consistent returns. You can also balance your mutual fund portfolio by investing in hybrid funds that combine equity and debt instruments. Thus, if you measure the risk to returns factor in your equity vs mutual fund comparison, you may find that the latter is a more favourable investment.
Control over investment

Professional fund managers manage mutual funds. As an investor, you just need to select your preferred fund and pay the investment amount. Fund managers use their knowledge about market movements, trends, and prospects to allocate your money in various proportions. They aim to generate decent returns. Essentially, they control the selection of stocks in a mutual fund portfolio.

Investors have complete control over equity stock selection, which may not necessarily be a good thing, especially for novice investors. Such investors may base their investments on rumours, market buzz and emotions, thus jeopardising their investments. Even investors with adequate market knowledge cannot control their investment if stock prices fall suddenly. However, they can choose their preferred funds and not have to invest only in those selected by fund managers.
Tax Benefits

Profits generated from stocks do not qualify for tax exemptions. You have to pay taxes on your equity profits as per your tax bracket you belong to investment tenure. You must pay short-term capital gains tax if you stay invested for less than three years and/or long term capital gains tax for investment durations exceeding three years.

While STGC and LTGC also apply on your mutual fund investments, you can avail of tax deduction benefits on investments of INR 1.5 Lakh per annum on Equity Linked Savings Scheme (ELSS) mutual funds. This deduction is available under Section 80C of the IT Act. All profits up to INR 1 lakh per annum from ELSS mutual fund investments are tax-free, whereas those exceeding INR 1 lakhs are eligible for a 10% LTCG tax. Note that ELSS investments come with a mandatory 3-year lock-in period, which means you cannot exit or liquidate this investment before term.

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Equity vs Mutual Fund - Which is better?

Besides analysing the broad differences between equity and mutual funds, you must select the better option per your investment objectives, capacity to withstand risks and your preferred investment tenure. The below factors can help you determine which could be the better investment option for you.

Trading and liquidity

All direct equity shares are liquid investments, and you can trade them anytime you wish. While you can also trade and liquidate mutual funds anytime, you need to check the cut-off times while executing trades to get the same or next business day NAV. Liquidity applies to all mutual funds except ELSS funds due to the 3-year lock-in period.
Costs of investment

Mutual fund investments involve an exit load, i.e., cost of selling, levied by the asset management company (AUM). Although it is a nominal cost, it can eat into your profits. With shares, you do not have to pay any exit load. However, you have to pay a small brokerage amount, a minuscule percentage of the investment and maturity value.
Individual stock selection

You can select every stock you want to invest in with your equity investments. However, fund managers manage mutual funds, wherein individual investors cannot select each stock they would prefer in their portfolio.
Speculation

With stocks, you can speculate their performance and enter or exit based on market volatility and other factors. You cannot, however, speculate mutual fund performance, primarily if you invest in longer duration funds.

Conclusion

Instead of choosing mutual fund investments vs equity investments, it is better to create an investment portfolio comprising both instruments. Doing so enables you to enjoy the benefits of stable to high returns, portfolio diversification, and risk mitigation. You can avail the services of an investment expert to guide you with your investments.

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*Disclaimer: This article is published purely from an information perspective, and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.

The purpose of the Live eNRIched blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.