Most Indians who are heading towards retirement are either invested in Fixed Deposits or Post Office Savings Scheme. With a minuscule return of 4-7% while inflation remaining stubborn in the range of 4-5%, their earnings have fallen sharply in the last few years. So, my question remains, is there any rescue?
There are mutual funds and equities that cater to the cumulative needs of millennial. They not only give you higher returns than the traditional products but are also liable to a lower tax outgo, thus making the post-tax returns more attractive.
However, many novice investors are confused when it comes to making the choice between mutual funds and stocks. On prima facie, they both may look the same, as equity mutual funds are also invested in equities. Also, both provide the flexibility of investing small chunks at regular intervals rather than an upfront lump sum amount. Lastly, both provide the scope to well-diversify your portfolio to mitigate the risks.
However, the management, flexibility and composition of these asset classes are what makes them truly distinctive from each other. Let’s look at the key differences between the two.
Caveats While Selecting Your Investments
1. Don’t compare apples with oranges: When the markets are in bull-run, both equities and mutual funds deliver impressive returns as compared to fixed deposits, PPF’s or Pension Schemes. Coming to the returns, many investors commit a mistake of comparing apples with oranges. If you’ve invested in mutual funds, then your overall direct equity portfolio needs to be compared with the returns of your mutual funds’ scheme. Again, the composition of mutual funds i.e. growth funds, dividend funds depends on the overall objective of the fund.
John C Bogle, Founder former CEO of Vanguard Group once quoted, “Surprise, the returns reported by mutual funds aren’t actually earned by investors.”
While investing in direct equities, the returns are crystal clear. Also, these returns depend on the selection of the stocks in your portfolio. If these stocks are selected carefully, then equities have the potential to deliver 10x-20x-50x or even more in 10 years. If history is to go by, many stocks such as Eicher Motors, Bajaj Finance, CEAT, Amara Raja, etc. have gone to register returns of 20x and more in the last decade.
2. Identifying right fund vs. right stocks: Lastly, for the beginners, many advisors recommend investing in mutual funds as investing in equities demand identifying the right stocks and a lot of efforts. However, this assumption may not always hold true. With more than 2000 primary mutual fund schemes in India, selecting the right mutual that suits your goal and risk requires equal efforts.
“The goal of the nonprofessional should not be to pick winners—neither he nor his “helpers” can do that—but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.” – Warren Buffett
With the arrival of many knowledgeable and credible stock advisors in the investing space along with the level of personalization, the potential of returns and flexibility that direct equities offers, it can be the way forward to create significant wealth for the future.