This article compares mutual fund investments with direct equity investments. It gives pros and cons of each, and suggests what type of investors should invest in each.

The question is - is this approach correct? Should one invest directly in stocks, or take the help of experts?

Well, the answer would vary from person to person. So, let me compare the two methods of equity investment, to help you find your own answer!

Factor 1 - Time

Many small investors "invest" in stocks for the short term based on tips and rumours, and that is the most inappropriate "investment" strategy. This is trading, and this methodology can suit only traders. They are the ones who invest huge capital and trade with large positions, such that even a 5 paise increase in a stock's price is very profitable for them. But for small investors, it is a losing battle.

Investment in shares should be done only for the long term, keeping in mind the soundness of the company's strategies and management. Investment in stocks, therefore, needs a lot of research. It involves fundamental analysis - a study of the fundamental factors that affect the performance of a company. These factors may include the industry in which the company operates, growth rate of the industry, domestic and international competition, overall economic scenario (interest rates, inflation, exchange rate, etc), and so on.

This research needs to be done not just before choosing a stock, but even for its continuous tracking during the entire holding period. This kind of research needs a heavy investment of time. Do you, as a small investor, have this kind of time to spare?

Factor 2 - Expertise

Researching a company requires a thorough knowledge of valuation and accounting principles, and interpretation of various financial ratios like RoE, RoCE, RoNW, etc. It would also require access to latest financial results and other financial information about companies.

Fundamental research would also require knowledge of the industry in which the company operates.

Do you have such access and expertise?

Factor 3 - Transaction Costs

As a small, individual investor, your transaction volumes would be very modest. This also means that most of the brokers would charge you the highest brokerage - remember, at most brokerages, the brokerage cost as a percentage of trade value decreases as your trade volumes increase.

This transaction cost has a direct and significant impact on your ultimate returns. And you prepared for this?

Factor 4 - Reaction Speed

If there is a sudden change in economic factors, and it changes some of the fundamental factors affecting the company, would you be able to think in a dispassionate, level-headed manner? Would you be able to act fast and react?

Factor 5 - Control Over Investment

How important is "control" to you? Do you want to decide how much is invested where? Or you can trust an external expert for your investments?

These are some of the factors that would help you in deciding whether to invest directly in the stock markets, or through mutual funds (MFs).

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Other articles you might be interested in:

• Goal Based Investing
• ULIP v/s Endowment Plan for Life Insurance
• National Savings Certificate (NSC)

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Note: Please treat the opinion expressed here as a broad suggestion. Please consult your financial planner / investment advisor before making any investment decision.