Investors often face this dilemma – should they invest in equity directly or should they opt for the mutual fund (MF) route. One of the ways to decide is looking at the cost involved in both the avenues.
If you compare the two investment vehicles on various costs associated, you will find that they are more or less even.
Brokerage costs: A person does not need to pay any brokerage while buying or selling MF units like in case of direct equity investment. However, the brokerage cost is more or less offset by the exit loads and fund house's fees.
Securities transaction tax: STT is levied at the rate of 0.125 per cent of the transaction amount while buying as well as selling equities. It is not charged while investing in MFs. However, while selling the units, it is levied at a rate of 0.25 per cent.
Dividend distribution tax: An investor does not need to pay this tax, which is otherwise charged at 12.5 per cent. But don't not get lured by this. DDT is charged directly to the mutual fund when it receives dividends on the shares it owns in the portfolio. Charging DDT to you when you receive the dividend from the MFs would only be double taxation.
The costs come down to be almost the same in both the cases. So, what does an investor do? Investing in either does not really depend on the expense or the tax structure. The choice of investment depends on you.
There are more than 5,000 stocks listed on the Indian exchanges, of which around 2,500 are actively traded. If you know any of these 2,500 stocks in detail - that is if you understand the business dynamics and the prospects of any industry and the companies within that industry – then you should invest directly.
For example, Ritish Anand works in a pharmaceutical company. He has had decades of experience within the industry and knows the positives and negatives of most players within pharma fairly well. He would be a fool to waste such knowledge and, appropriately, most of his stock investments are in the pharma sector. The returns on his portfolio beat any pharma fund hollow. However, for exposure to the rest of the industries in the economy, he opts for the MF route. Needless to add, his portfolio is thriving.
Similarly, one may be working in the auto, cement, engineering or even information technology sectors. Use such domain expertise of your industry to invest well. On the other hand, if you are going to buy a stock based on a colleague's recommendation or something that you overheard during the office commute or, worse still, what you read in a broker report, you may as well kiss your money goodbye.
The last point, about the broker reports requires elucidation. Brokers make money based on the number of times you actually trade. The more frequently you trade, the more is the broking income. If they (the brokers) actually knew, which stock is going to multiply many times over, they would be busy buying the same instead of buying it for you. Bottom line - if you ever buy a stock directly, let it be based on your own homework and not because of some glossy report generated by a glossier broking company.
Also, look at it another way. When you have a health problem, you go to a doctor. Similarly, a legal problem is solved by the help of a lawyer. These are domain experts in their own field and one recognises them as such and uses their professional guidance. Similarly, MFs and their fund managers are domain experts as far as the stock market is concerned. Just as you won't self-medicate or fight your own case in court, do not try to do the fund manager's job yourself. It is the fund manager's business to understand other businesses and you should take advantage of the same.
When it comes to the stock market, never trust anyone but yourself. Never, depend upon tips and hunches. Do not self-medicate. Otherwise, you will neither be a bull nor a bear, but you definitely will be a bakra .