Mutual funds or equity shares while understanding mutual funds as proxy for other investment products

Last Updated on November 25, 2021 by Rajeev Bagra

Mutual Funds: Not just for equities or saving taxes but substitutes for other investment products including fixed deposits and gold

Many believe that mutual funds are all about investing in stocks/shares of listed companies. Some also know that they can invest in mutual funds and save taxes. However, mutual funds offer substitutes for almost all other investment products. For instance, FD investors may go for credit opportunity funds or other debt funds, depending on the tenure they wish to invest. Those who invest in gold may go for gold funds and so on.

Buying stocks/shares of listed companies: Should you invest through a mutual fund or buy stocks by yourself?

It depends on whether you are ready to spend some time doing research on equities or not.

When it comes to investing in shares, it is surprising that we are more than often asked to invest through mutual fund instead of selecting stocks/shares/scripts of listed companies by ourselves, which anyway the fund managers in charge of mutual funds should be doing in lieu of a fee.

The general lesson of academic research into active management is that the less you pay experts to manage your money, the more you keep. It is highly unlikely that most of us do not have the time or skill to zero in a few investment scripts for the next 2 to 5 years which the mutual fund is all about. As investment can be as low as one share of a company, the argument that a small investor cannot invest in a large number of scripts is baseless. So, if we are willing to put in a little more effort understanding what the so-called fund managers do, we can save on the charges that we pay to them thereby increasing our returns. Building on this theme, we recommend The Lunchtime Trader by Marcus de Maria.

Also while doing so, a whole new world of finance will open which should help other endeavors like figuring out the best company for our next home loan.

For the rest who are too preoccupied with their current jobs, investing through mutual funds is still very much advisable. For them, a mutual fund is a smart way to invest in a number of listed companies/debt funds wherein you need not track the performance of a single company or debt fund on a day-to-day basis. You leave the research part to professional fund managers well versed in investing in the mutual fund.