What’s Better? Investing In Equity Mutual Funds Or Directly In
Stocks
Equities
have out-performed other investment asset classes over the long-term in India
as well as globally. With growing maturity, retail Investors in India have
begun to realise this and also take into stride the short-term volatility of
this asset class. Better regulatory environment and improved corporate
governance have also helped bring more investors to Equities.
Currently,
retail equity investment in India is mostly channeled directly in stocks.
Individual investors hold around 20% of the total equity market value, while
mutual funds account for about 3%. This is almost the opposite of global trends
where retail money is mostly professionally managed and mutual funds are the
investment vehicle of choice for equities.
Why should India be different? Does direct investing provide any
benefit over investing in equity mutual funds?
To
answer this question, we conducted a study to compare the historical
performance of Indian equity funds to that of the stock market over the last 10
years. We chose 25 equity mutual funds based on size (highest assets under
management) to represent the entire equity mutual fund industry in each year.
We compared the median yearly return for these funds to the yearly returns of
the Nifty. Here’s what we found:
The
analysis shows that
- Equities in general created
wealth for investors over 10 years
- The return provided by both
mutual funds and the market varied significantly from year to year
- In each year, there were
significant differences in returns between the two
- Equity mutual funds
outperformed the Nifty in 7 of the 10 years
- The cumulative annualised
return of Equity mutual funds over 10 years was significantly higher than
the Nifty.
The conclusion: Equity mutual funds in India have been
relatively consistent in outperforming the broader stock market.
This
not surprising.
Mutual
funds are specifically designed as well diversified investment portfolios.
Professional money managers who ensure rigorous investment discipline manage
these funds. The fund managers are generally able to devote more time and
resources to monitoring investments, than an individual could, and tend to
react less to short term investor sentiment.
Equity
Mutual Funds offer the best option for retail investors to participate in
Equities. With a robust institutional and regulatory framework in place, we
expect that equity mutual funds will continue to maintain this position in the
coming years.
An
interesting aspect which we discovered during this research is that there was
considerable variation in the composition of the top 25 equity mutual funds
over the 10 years reviewed in our study. On average, approximately one fourth
of the top 25 funds were replaced by new funds every year. The Indian mutual
fund industry is continuously transforming and accordingly, close monitoring
and evaluation of the equity mutual funds on offer is essential to increase the
chances of better performance.
Periodic
evaluation and rebalancing has long been considered the secret ingredient of
better investing. What is required is the constant monitoring of fund
performances and the discipline to change our selected funds at periodic
intervals if required.
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