By Nilesh Naik, Head of Investment Products, Share.Market (PhonePe Wealth)

One of the most celebrated cricket commentators Harsha Bhogle had recently said…”This is young India at work. Give them a stage and move out. Our generation thinks: don’t lose. This one inhabits a different world. They see victory, opportunity.” While what he said was in the context of the Indian cricket team’s phenomenal test victory over team Australia, this change in mindset and attitude of young Indians seem to reflect in many spheres of life; and investing is no exception. 

The recent growth in the number of young Indians investing in stocks and mutual funds is a testimony of this change in attitude towards investing. Another interesting trait of these youngsters is their hunger and openness to learn about investing. Having interacted with many young investors in recent times, a common question they have posed is….… Should I stick to investing in equity mutual funds or should I also invest in stocks directly?

While there’s no straight answer to this question, here’s an attempt to put this “equity mutual funds or stocks?” debate in the right perspective, especially considering the changing mindset and attitude of young Indians.

First of all, there is no doubt that equity mutual funds are one of the best investment products for retail investors given the various advantages they offer – diversification, professional fund management, strong regulatory framework, low cost, affordability, transparency, convenience and so on. The strong regulatory framework and some of the other characteristics of mutual funds stated above significantly helps in protecting the interests of the investors. However, they also come with certain investment constraints. As such, most equity mutual funds may not be able to deliver huge outperformance relative to their respective benchmarks. In fact, from a long-term perspective even 100-200 basis points of outperformance vis-a-vis benchmark can be considered reasonably good for an actively managed equity fund.

Direct stock investors on the other hand do not have any such investment constraints and can construct their personalized stock portfolio to suit their own risk appetite. So does that mean you should prefer direct stocks over equity mutual funds? Well, before we answer this question, let’s look at the type of flexibility that direct stock investing offers vis-a-vis mutual funds.

  • Ability to own a concentrated portfolio of stocks: When you invest directly in stocks, it is possible to own a very concentrated portfolio of say 5 or 10 stocks and allocate say 20% or 30% of your portfolio to a single stock. In contrast, a mutual fund scheme’s exposure to a single stock cannot exceed 10%. Even if the weight of a stock exceeds 10% due to price appreciation, a fund manager has to exit a portion of the existing holdings to bring back the allocation below 10%, which could potentially lead to an opportunity loss if the stock price continues to go up.
  • Ability to invest in niche investment themes: If you are a direct stock investor, you are able to construct a stock portfolio based on some niche investment theme(s) that you expect to play out from a short to medium term perspective. Though mutual funds offer thematic schemes, it is difficult for them to offer schemes based on niche themes having limited stocks to invest or which are not attractive enough from a relatively long term perspective.
  • Ability to invest in small cap or micro cap stocks without any constraints: As a direct stock investor, you are easily able to make your desired allocation to small cap or micro cap stocks, due to smaller ticket size of investment. For mutual fund schemes with large assets under management, it is often difficult to take reasonable exposure to smaller companies due to (a) liquidity constraints and (b) regulatory restriction that caps the combined investment of a mutual fund under all its schemes to below 10% of any company‘s paid up capital.

While all these seem to be great advantages of direct stock investing, it is important to note that such flexibility comes with substantial increase in the portfolio risk. Therefore, if you have the necessary risk appetite and curiosity to explore stock investing, you could consider allocating only a small percentage of your portfolio to direct stocks to start with, complemented by long-term core allocation to other investment products such as equity mutual funds. And over time, you could decide an appropriate allocation to direct stocks depending on your experience, risk comfort and success in achieving desired results. 

However, it is important to avoid investing in stocks based on some arbitrary tips or news and instead conduct thorough research for selecting stocks and building your stock portfolio. And if you want to invest in direct stocks but find this process too complicated or do not have sufficient time to undertake such research, you could also consider availing services of SEBI registered investment professionals (Research Analysts / Registered Investment Advisers) who offer curated stock portfolios in the form of WealthBaskets.

PhonePeWealth Broking Private Limited is a member of NSE & BSE with SEBI Regn. No.: INZ000302639,

Depository Participant of CDSL Depository with SEBI Regn. No.: IN-DP-696-2022 and ARN- 187821. Member id : BSE – 6756 NSE 90226. PPWB acts as a distributor of Mutual Fund and WealthBaskets. Investments in the securities market are subject to market risks, read all the related documents. This content is exclusively for educational and informational purposes only. Disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.