Jagoinvestor
March 29, 2012
5 difference between stock & mutual funds Investing
When we say Equity, what comes to your mind – Stock or Equity Mutual Fund? While a single stock or a mutual fund both comes under the category of Equity and they are good option for long-term investment and needs periodic review. There are some differences between stock investing and mutual fund investing that is done by a common man. It’s a good idea to know where they differ and in which situation they differ, so that one can take better investing decisions. Let’s look at the main differences
Volatility
When you invest in a single stock or bunch of stocks (3-5 scrips), the change in it’s value is very high. On a given day it can be extremely volatile. It can give you 20% return and sometimes -10% loss also depending on the environment. This can be very exciting and at the same time very disheartening and gives you a feeling that you need to “act fast”.
Mutual fund on the other hand is not that much volatile by nature, as the diversification is very large and at a time 50-100 stocks are covered. Different kinds of stocks from different sectors and market capitalization are involved in mutual fund and the over all change in value is thus less volatile (other than extreme days).
Return Potential
This is very much in line with the above point but still let’s look at it separately. There are lot of success stories where someone got quick rich by investing in equities directly and it can happen, but those are rare happenings and require lot of work and analysis, patience and belief in what you have picked. If you want superb returns in short time and you believe you can research well, you can go for stock investing directly but then risk is also more.
Mutual funds are known to deliver good returns (not in line with stocks, but still very good). So you can expect handsome returns from mutual funds but not unbelievable like stocks return. This is mainly because the money is diversified across different stocks (read ideas) and chances of all of them becoming a super success in short time is impossible.
Monitoring Required
Stock investing is a personal affair and you are doing it on your own the decision of what to sell and what to buy is on you. Even in case of long-term investing, you might have to keep an eye every quarter or yearly unless you have really spent some good time in picking the good stock. You need to also keep an eye on news and sector specific developments.
Monitoring in mutual funds is relatively low because the job of monitoring is anyways done by the fund manager who is paid SALARY to filter through the fluctuations. He constantly adds and removes the stocks from the portfolio. This can be a positive point, but sometimes it can be a negative point also if there is too much of churning.
SIP Investment
Mutual funds are known for possibility of SIP (monthly investment). SIP in mutual fund works and is recommended as a great way for a salaried person to invest in equity markets for long-term basis without understanding the working of equity markets.
However SIP in stocks do not work. Yes, some companies provide you the facility of SIP in stocks, but it’s a terrible concept. There is no diversification and SIP in a particular stock does not make sense because the risk is with single stock. A stock can be in a bad phase for years and decades, whereas in a mutual fund the bad performing stock is weeded out.
Asset Class Restriction
Stocks investing is restricted to Stocks only. You can choose a large cap stock, mid cap stock or small cap stock, but finally it will be equity asset class. However, mutual funds can invest in mix of asset classes. There are equity funds, debt funds, gold funds, Mix of Equity and debt also. To top up, even balanced funds are there which can adjust the asset allocation on its own, so in a way mutual funds are more superior in terms of features compared to a single or bunch or stocks.
Conclusion
Mutual Funds are actually collection of stocks only but just because it’s a group of stocks the characteristics are not very similar to that of stocks. You should be clear about all the points of difference and only after that you should decide whether to invest in Stocks directly or take the Mutual Fund route.
Thank you for the Amazing article. It is really beneficial.
Hi,
I just heared about a new bond: “HUDCO Ltd tax free secured redeemable non convertible bonds”, is it really safe to invest in???? Could u plz give me any idea?
Soma
PLease start a thread on our forum to ask about it, you can create your account here – http://jagoinvestor.dev.diginnovators.site/wp-login.php?action=register and ask your questions here – http://jagoinvestor.dev.diginnovators.site/ask
Hi manish…i want to invest my money, but very confused where to invest; stocks or mutual funds ? I am a salaried person with around 30k/month. So can u guide me which is safest place to invest; as a short term investment ?
Here is how you should start – http://jagoinvestor.dev.diginnovators.site/2012/11/investing-for-newcomer.html
If you are new, then you should go for mutual fund but if can analyse stocks then go for investment in stock market for long term in blue chip company, you will get handsome gain.
Nikunj
Have you experienced the same thing
Dear Manish,
I am a regular reader of your articles (Jagoivestor). As your web name is JAGOINVESOR, its really doing a great job in creating awareness among the common investors. Two months back I have stared investing in MF and Debts funds with the help of a certified FP. Being very new and not knowing ABC of Mf, I find your forum/articles very useful, informative, lucid and much relevant to our curiosity of knowing more on Mfs. I have been reading your forum/ articles for last 6-7 months and in spite of the fact that i am not a good communicator I cannot resist my temptation to acknowledge my feelings. Its really great and wonderful and please do keep writing towards making us (INDIANS) a SMART INVESTOR
Suresh
You are a good communicator and your have conveyed your feelings very well here 🙂 . Please keep on commenting and be in conversation !
For long term you can invest in Equity in following stocks for minimum 5years time frame. You will get handsome gain.
1. Tata Motors
2.L&T
3.Axis Bank
4.PNB
5.DLF
6.Suzlon
7.Reliance Power
8.RIL
9. JSW Steel
sir, i am thinking to invest some amount monthly by SIP in SBI gold fund for my child education who is now 3 years old. please tell me whether i am taking correct decision? or suggest me the best option.
For long term … gold is not the best investment vehicle ! . better invest in mutual funds (pure equity)
For long term you can invest in Equity in following stocks for minimum 5years time frame. You will get handsome gain.
1. Tata Motors
2.L&T
3.Axis Bank
4.PNB
5.DLF
6.Suzlon
7.Reliance Power
8.RIL
9. JSW Steel
Thanks for the list . what is the basis of choosing these stocks !
If you are new, then you should go for mutual fund but if can analyse stocks then go for investment in stock market for long term in blue chip company, you will get handsome gain.
This is a general query:
Suppose i want to build say 50 Lakh in next 10 years by MF SIP by selecting say MF-A,MF-B, MF-C and i have invested for 5 years, in case after 5 years MF-A starts performing badly like Reliance Growth now and assume i have already invested around 8 Lakh in this fund, so i am forced to sell this fund in this case what should i do? how do i reinvest this amount? do i have to do SIP again with some other fund with 8 lakh amount? which will eventually affect my planned amount 50 Lakh as doing SIP again takes time also to get returns from new fund for remaining 5 years SIP reinvestment is difficult, Can you please let us know what is the strategy to follow in this case of scenorio?
Performance of Mutual Funds depends on the fund management primarily. If IDFC Premier is doing too well, it is because of Ken Andrade. If HDFC funds are doing well, it is because of Prashant Jain.
Looking at Reliance growth, it went downhill because of Madhu Kela moving out of the fund management quite a while back. (http://forbesindia.com/article/boardroom/why-madhu-kela-moved-out-of-reliance-mf/22172/1) My suggestion to you is to transition out of Reliance growth. There were definitely warning signs for that fund for some time (Value Research ratings went down from 5 to 3 gradually).
There are multiple strategies how you can move the funds either in bulk (sell high and buy low) or gradually using SWPs and SIPs. Your risk tolerance and mileage may vary.
Manish,
Very good compilation. I have been in investing in both stocks & MF for the quite sometime and have benefited from it. I feel many new investors fall trap to stocks with the lure of making quick money, instead they should start via SIP in MF and then do extensive research and invest in stocks.
The statistics say that only 10% of people make money in stocks.
Rakesh
I think 10% is too high ! . it should not be more than 5% !
I enjoy trading in a smaller capacity and do it regularly though I have very bad experience in stock trading.
Glad to know that Suman Gayen ..
Take away the zero Rakesh 🙂
@Ravi you are correct, but still those investors can’t avoid inflation risk. As Manish asked 1 yr & 10 yrs risk is same? He wanted to mean that if the time horizon is 10 years the risk is very less. In modern portfolio theory the slogan is maximum return with minimum risk. We always consider the time horizon and the investor’s investment in different asset classes so far etc. Mutual fund is managed fund but stock is not. To beat inflation one has to invest a portion in equity depending on his/her risk appetite & time horizon. If you save one rupee, you save it for tomorrow and today’s money is valuable than tomorrow’s money, so let your money work for tomorrow!
those who dont want to take risk should invest in PPF/FDs. as MF and Stocks both have risk and it is very risky to decide which one has less risk because risk is risk.
Ravi
You mean 1 yr investment risk in mutual funds is same as 10 yrs of investment risk ?
Manish
People who invest little bit money every month, they have only one best option — Mutual Funds. Otherwise, go for Direct Stocks.
Thanks,
Sekhar
Yes . i also think so .. SIP in mutual funds is best way to create wealth for those who have monthly cashflows !
Investing in sghares or Equity Mutual fund, carries a level of risk, where it may vary marginaly between them . Better option identify a script and go for a sip in the script.
SD
SIP in a stocks is not recommended !
Dear Manish,
Why don’t you recommend SIP in Stocks? Is there any particular reason?
Thanks,
Sekhar
Sekhar
Read this : http://www.subramoney.com/2010/12/sip-works-only-in-a-portfolio/
Hi Manish,
From Subramoney.com,
“With a single scrip you can average, but requires tremendous amount of information, and skill.”
Yes, I don’t have that much knowledge and skills. So i also agree with Mutual Funds.
Thanks,
Sekhar
Yes .. it will take much much more effort in single scrip to average and do SIP , which is really not in control of a common investor . So better do it in SIP !
As the article says, the equivalent of SIP in Stocks is called “cost averaging”. Works very well in a market downtrend when there is too much pessimism. But there is always risk in making an investment unless you are very clear about the future in that investment. If you have a position in a stock like ITC and it goes down by 15-20%, it makes a lot of sense in cost averaging. But not in a broker managed scheme like an Equity SIP.
Please don’t try this mechanism unless you are very clear that it is a safe additional investment. Don’t blame me for the advice. 🙂
Hi, Is money earned by Mutual Funds Managers from Investments distributed completely to Customers?
Hi Vijay .. yes , but after deducting expense ratio ! , which is very valid .
Hi,
See what happened to the Reliance Industries? Reliance lead the market in 2003-07 period. It touched 1600 on Jan, 2008 and now it is at 724. It was a fancy stock in that period, but not now. So buy at low and sell at high is always better strategy for every one. It’s not our wife to keep with us for the long time period. It will apply for the stocks as well as Funds.
Thanks,
Sekhar
sekar
by saying this your asking to time the market.Like i said before its easy to say you should have sold reliance in 2007. But how many people who invsted in it in 2002 without any research would have done that? a cagr at par with 30% for 7 years why would they sell it..they bought it on someone advise and they would have waited for someone to say SELL. And no broker on news or any form talked about SELL in 2007 did they?
That is why its tough for individual to do direct investing without investing enough time on research and constant check
Hi Prabe,
I agree with you. But Reliance touched 1600/- on jan, 2008 (all time high) did not touch that level till now and everyone knows it’s not a growth stock. I don’t understand why mutual funds still have this stock in their portfolio.
If you really looking to invest in Mutual funds for the long time, then why don’t you prefer direct stocks? Can any one say that Power Grid and L& T Finance will not touch 400 and 200 respectively after 10 years? Right now they are available at below MRP rates. Coal India is the 2nd largest Coal company in the world. Our cement companies are the largest in the world. Our banking system is very strong than many largest financial organizations like CITI Group, JP Morgan..etc. There are so many good companies in our country. We can easily find out them in bear markets.
If you don’t have time, then go for Diversified Mutual funds. But if you don’t have time and you want to learn about stock market, then go for Nifty Bees and Junior Bees.
Thanks,
Sekhar
Another good one manish.
From the comment section it feels like people are comfortable with direct stocks.
There are lot many risks involved in direct stocks.Yes the return is conservative 12-15% in mutual fund. But if you have diversified direct stock portfolio of 10-15 stock how many of them will surpass this conservative estimate. You should be too good to get anything like 15-30% CAGR with your stock list.
People can always come and say if one had purchased just HDFC,Infosys and ITC from Nifty they would have made 25% CAGR for past 15 years. But how many would have been ready to take such concentrated risk?.
I am not vouching for MF but for a full time employeed person with little time to do research and keep constant check,he is better of with investment in MF.
Disclaimer:I have 50% in direct and 50% in MF
True.
Infosys touched around 2800 in Jan 2008 and dropped close to 1050 by Jan 2009. How many have the temperament to hold the stock when it falls that much.
Post that Infy has touched 3400 in Nov 2010 and trading at 2800 now.
Definately .. thats the point of investing in mutual funds .. thanks for your views !
I have a doubt on Mutual Funds.
For example, Lets take one best Mutual Fund, Say “Franklin India Blue chip Fund (G) “, This has given 48% CAGR returns from May, 2003 to Jan 2nd, 2008. But from May, 2003 to Nov 10th, 2010, CAGR is 25%. Everyone thinks if market falls, then we can get more units and more returns. But this works in reverse for Mutual Funds. But if you directly invest in stocks from May 2003, You will be getting huge returns than Mutual Funds. If there is atleast one company like Satyam in our Mutual Fund, Then we get negative returns and we can’t ask the fund house to remove that company from the fund portfolio.
Lets take 2 Mutual Funds A and B.
A fund has given 30%, 32%, 30%, 32%, 35%, 30%, -10%, -15% (2004-2011) returns in last 8 years and B has given 20%, 26%, 20%, 25%, 36%, 32%, -3%, -2% (2004-2011) returns for the same period. Now tell me which is the Top rated mutual fund ? A or B?
And if we calculate the returns upto 6 years, then A will be the top rated Fund. If you calculate returns upto 8 years, then you can find out the secret of Mutual Funds.
Thanks,
Sekhar
Sekar
Are you referring to SIP returns or fund return and this may vary. Also the units bought during down turn of 2008 is yet to pick up.The last 5 year nifty return is in range of 5-7%.
SIP works and it works best in mutual Fund and works the worst in case of Equity SIP
Hi Prabe,
I am referring SIP returns. For “Franklin India Bluechip Fund (G)”, From May, 2003 to Jan, 2008; we got 840 units if we invested 1000/- every month. Total Amount Invested is 56,000/- and Investment Value as on Jan 05, 2008 is 1,65,282/-. CAGR is 48%.
But From Myy, 2003 to Nov, 2010; we got 1074 units if we invested 1000/- every month. Total Amount Invested is 91,000/- and Investment Value as on Nov 05, 2010 is 2,48,340./-. CAGR is 26%. On Nov, 2010; Markets touched the all time high 6320 after jan, 2008.
I am not against Mutual Funds. But how can we identify the best Mutual funds out of 216 Funds? Every year ranks will be changed by their performance and we don’t know the performance of present top rated funds in 2003. If i am wrong, correct me.
Thank,
Sekhar
Sekhar,
You may not want to go by the ranking of the funds. For some indication of how a fund is doing, just look at the Value Research rating (www.valueresearchonline.com) or browse the ET Wealth (published on Mondays) rating tables. A 4 or a 5 rating in the respective category Diversified equity, Balanced) is decent. If thr rating goes up or down any week/month, just look at possible reasons. Compare the returns of the fund with other top rated funds for some insights.
If the fund doesn’t match your expectation in terms of performance (or met your goals) etc. throw away any emotional association and sell the fund.
Sekhar
Yes .. any mutual funds is always good in a particular time frame , if a fund is good in 5 yrs time frame, it can be bad in 8 yrs time frame .. you can find out the CARG return of 2 funds , and one of them will be above other, but that does not mean its the best one ! .. you also have to look at the variation in providing good return !
Hi Pramod,
I have never invested in stocks as my father never allowed me. There is no great book on Stock Market in this World. But if we have, then that book will be the best seller in the world and the author will win Nobel Prize.
Many people say there is a book “The intelligent Investor”. But the book say only one thing “Margin of Safety” and ” Incremental Value” or “Fair Value”.
Current Nifty P/B Ratio is at 2.94. Only 4 times in the History, Nifty P/B ratio is below 3. So this is the right time to enter the market (If you miss the bus in Dec, 2011).
Now a days, It’s very easy to identify the best stocks. We don’t need to analyses stocks because everything is displayed on websites like Moneycontrol.
Today inflation is very High. So go for Interest Rates related sectors like Banks, Two wheelers and Auto Sectors. I avoid Infra Sector, but like to buy the IVRCL. Because it seems to be the strong company in this bull market. I feel RBI will lower the interest rates after 3 to 4 months. So we can directly invest in these sector stocks.
Open this link. “http://www.investinternals.com/2008/07/what-are-reasons-behind-huge-stock.html”. It may help you.
From the above post, You can understand that Inflation, In stable political conditions, Fuel price hike, US economy slowdown and Large selling activity by FII’s can influence the Market. Now what about the current Indian Economy Situation? Inflation and Crude is still high. So in the short term, Market will fall. But in the long term, You can get huge returns if you invest money every month in stocks (Specified Sectors only)like SIP.
Come to the Mutual Funds, People like Warren Buffet and Peter Lynch never recommend us to invest in Mutual Funds. This concept is developed by Brokerage Institutes for their Commissions (This is my personal opinion only).
Thanks,
Sekhar
Peter Lynch himself managed Magellan funds for 12 years or so that propelled him to fame.
What Warren Buffett does as part of Berkeshire Hathaway is not called a Mutual fund by anyone – but is indeed a holding company for a number of companies that they buy [with control].
I would still rate “The Intelligent Investor” as the best book ever on investing because it is practical and it details asset allocation, the pitfalls of chasing unexisting returns and almost the breadth and depth of the market except for derivatives [He handled Warrants though].
To each his own:
– Stocks : High risk High return
– MF: Relatively low risk; Relatively lower return.
Both usually beat the market [India growth story will ensure MF returns continues for a long time].
Both beat Inflation.
Individuals can choose which way to achieve financial goals!
While I agree that new investors should go via mutual fund, they should also know the drawbacks of mutual funds. Some are listed here:
1 – They charge good amount of money. About 2.5% of total value of your asset is charged every year by majority of mutual funds. So, if ‘market’ is growing at 12.5% every year, then your fund may grow by only 10%. It makes a huge difference over 15-20 years.
2 – Due to their size, they cannot afford to buy not so liquid stocks. hence they invest primarily in liquid stocks, which you can also do.
3 – The fund name and the investment they do can be totally different. If you do not watch the fund closely, sometimes you get raw deal here. This hurts people if they invest in specific MFs looking at their names like Enrgy fund / Infra fund etc. But Fund Manager may buy anything that he choses to.
4 – There are cases where they try to make personal profit when they buy or sell stocks in their fund. 4-5 months back i heard HDFC penalising few fund managers for doing this ‘front loading’. I am sure many fund managers do it. Subra (subramoney.com) had mentioned in one of his blogs that fund manager’s office is crowded with brokers who want to see what they might do and profit from this advanced knowledge.
Finally, I wouldn’t trust giving my money to someone (Fund Manager), or for that matter anyone. If you can analyze annual report reasonably well, then I suggest you invest directly in stocks and have a diversified portfolio.
If you find it difficult, then I suggest you invest in Index mutual funds (Benechmark Nifty, benchmark Bankex etc). They atleast charge less (0.5%) and also do not speculate.
Regards,
Bhushan.
A handful of Mutual funds (including Balanced funds) have beat the index by a large margin over a decade or even more. Such long term performance does not happen by chance.
It is very easy for someone to say a direct stock portfolio can beat the market. But only infinitesimal number of people have the temperament for digesting the wild swings in an individual portfolio. I personally favour direct investing as well but such a strategy is not suitable for a bulk of the population – this I think we can agree.
You are absolutely correct when you say that very few MF or stock portfoilo’s beat the market in long term. I have also seen that in some cases where they have beaten the market, it is by luck also.
Now the question is: why should we beat the market? (There is nothing wrong with the market. So why “beat” it 🙂 ). A low net worth person, might look at getting very high returns (more like lottery) so that he can jump to slightly better position. But an HNI might be intersted in protecting his assets with reasonable returns (probably slihglty higher than FD). You can see this when you notice that most of these tax free bonds are oversubscribed by HNIs 4-5 times. So, everyone’s goal is different and they don’t have to compare with market returns. In my case, I don’t care about beating the market as long as I do better than my neighbour !!
sorry for changing topic from MF discussion. I thought I will pen down my views on this as well.
Regards,
Bhushan.
Bhushan,
While I do respect your perspective and opinions, I would like to provide my perspective on this as well.
On Point 1 (2.5% charges): That is the cost of doing business for a service that is provided. Aren’t we compensated for the work that we do or the service that we provide? Whether there is transparency is terms of the charges is something that merits a totally different discussion.
Point 2: Funds that invest in illiquid stocks are mostly hedge funds or speculative funds. If the fund manager is smart, he will find innovative ways to do an off-market transaction. In any case, most respected funds don’t keep a high % of illiquid stocks. That is a recipe for disaster. If very few people want those stocks, why bother with them?
Point 3: Fund managers have to strictly adhere to the norms of capitalization, % of stocks/debt that they can own etc. Most funds make it a point to publish their data with a 1 month delay and you can very well view it in many sites. The reputation of a fund depends on the reputation of a fund manager. I would go with any fund managed by Kenneth Andrade or Prashant Jain because they have an excellent standing in managing within the boundaries they are allowed to.
Point 4: HDFC is one of the most respected institutions. There are always bad apples in every organization. Punishing the managers is a good thing. I haven’t seen any other fund house come out in the open and say about any bad things that happened within their organizations.
Most of the investors don’t have the time to learn about the market and the intricacies associated with the market. Mutual Funds are the best route for them since they don’t have to (they can’t!) monitor them on a minute-by-minute basis or have the risk appetite to deal with lots of scenarios. There is very little information that is shared to the investors by the respective companies and fund managers are the best bet to have access to this information.