What’s Better? Investing In Equity Mutual Funds Or Directly In Stocks

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.

We are convinced that 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. That’s why, one of key features is the constant monitoring of fund performances and the discipline to change our selected funds at periodic intervals if required.

Happy Investing

Source:Scripbox