Equity Shares or Mutual Funds ? An analysis with pros and cons

You might not have come across much write up on comparison between mutual funds and equity shares as common impression is that both are for different segment of investor. However the question is what are those criteria which decides the segment in which you fall.

Let's take Equity Shares first as things are pretty simple in it. Buy shares of any company, any sector, any scale, the risk involved is as large as to the extent of full investment. On the other hand the returns can be extremely high in long or short run. It is "High Risk Uncertain Return" deal rather than high risk high return. The reason for high risk is lack of diversification in funds deployment. 

An example, if INR 100,000/- is invested in Bharti Airtel at any point of time, your returns are purely on the mercy of Bharti's Business Performance, Long Term Strategies and Telecom Regulations by Govt of India. Anything going adverse or favorable in all these elements will have direct impact of market value of your investment. Imagine if you were intelligent enough to divide INR 100,000 into two parts and invested INR 50,000 in Bharti (Telecom Sector) and Balance in Colgate-Palmolive (FMCG Sector). Your risk is diversified to the extent that if in case something major goes wrong with one sector your another investment will either recover the loss or equalize investment amount.

The example above is only theory, just think if you have to invest money in shares and you are skeptical about the complexities of Stock market, how difficult it would be to you to decide the allocation of funds in such a manner that you minimize the risk in a  way that you hope to get higher returns.

Mutual Funds on the other side are the perfect product to people who intend to take part in Equity Shares market but due to lack of expertise in this sector they are not able to do so. Mutual Funds are regulated Fund houses which makes a pool of funds from various investors and deploy it in Equity Shares (only in case of Equity Diversified) of various sectors and various companies. These allocation of funds are done basis historical trend, company profile, future business strategies and lot more about the companies in which money would be invested. There are large teams of expert keep doing research on our invested funds round the clock so that we get best out of it.

Let's continue with example of INR 100,000/-. Since you are not the expert of stock market you decided to invest money into mutual funds. Even if you invest entire money in one product, your risk would get diversified because AMC would invest your INR 100,000/- in, may be, 100 different companies from different sectors. Now if in case 50 companies returns loss or no return, other 50 would ensure that you get good return overall.

Mutual funds not only provides you consistent return but also protect your investment from big shocks. AMCs review their investment portfolio every moment and take immediate corrective action to avoid any losses or to grasp any opportunity. They have all kind of market intelligence which is vital to earn money from stock market.

Further, mutual funds ensure that they have products for all kind of investors. There are products which will give you return like Fixed Deposit and no risk and there are products with high risk (as full money would be invested in equity shares) and high return. Now a days buying mutual funds is exactly like buying equity shares through Demat account.

Taxation structure is such that it will not have any incremental effect on your income tax in both the cases. If you sell your product (be it Shares or mutual funds) after 12 months of purchase, there will be Nil Tax on your income. The same applies to brokerage, it is almost similar for both the cases however it might change from broker to broker.

At last, I would say that Equity Share market is for those who are really the experts of it and can absorb few shocks on their fat wealth. On the contrary, Mutual Funds are for those who are not the experts of stock market and wealth is not fat enough to absorb any shock from stock market.

There are countless mutual funds in India which provides you returns of 200 to 300% in three years period.What else one need, this is best return after Real Estate Investment.