Active equity Mutual Funds Vs Direct Stock Investing

Q&A: Questions & Answers Portfolio Q&A
1

Pros and cons of Active equity Mutual funds over direct stock investing.

Pros,

  1. Expert taking care of the funds. Can be the best option for someone who has less knowledge in direct investing or economics in general.
  2. Dividends are reinvested without paying tax.
  3. Equity mutual funds can hide some percentage of debt / foreign investments and still call it an equity mutual funds which attracts lower equity capital gains than debt-oriented investments. you don’t have this option when directly investing in stocks.
  4. Stock switch within a mutual fund does not attract tax. when you do this yourself. you need to pay capital gains.

Cons,

  1. There is an Expense ratio for the funds. (a charge for managing your funds. )
  2. No control over the stocks or the allocation percentage. (some degree we can achieve this by choosing types small, mid, large, flexi etc anyway still complete control is missing.)
  3. The behaviour of the group of investors who invest in your fund matters if they sell in the wrong time. mutual fund will be forced to sell the stocks even when you want to hold it tight.
  4. There is a need to track mutual fund manager/fund performance. its not like buy mutual fund and forget. some kindly of analysis is still needed regularly to know whether they are doing what you expected. whether The strategy of the manager aligns with your goals.
  5. When you decide to switch to another fund it can be costly. which attracts captial gains. where as with stocks. you are only selling a part or portion of your portfolio.
  6. They cannot allocate huge bets to one stock. They have limitations set forth by regulators for allocations in one stock. if the stocks itself delivers far better than other stocks in the portfolio. If it grows beyond the limits setforth. fund house has to sell some part of the best performing stocks.
  7. Risk Fund manager can switch jobs but you are stuck with the mutual fund.

Nutral points,

  1. Income tax old regime has support to show ELSS scheme. New Regime has no such options.

kindly add if I miss anything more important. I will keep this updated if anything important is shared in this thread.

2 Likes
2

This shouldn’t matter and is neutral if they all stocks in proportion of holding. This can benefit if they sell over valued stock which turns out to be under performer. This will be negative if they sell something which turns out to be out performer.