Mutual Funds vs. Direct Investment
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active 1 year, 12 months ago
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Mutual funds are often seen as the most hassle-free mode of investment. While they have many beneficial attributes they are also bound by certain disadvantages. Here are some ways in which investing directly is better than mutual funds.
Cost:
Mutual funds carry a high cost and are spread across various heads. Professional management fee is only applicable in case of mutual funds. Additionally, there are also costs like entry and exit load. Entry load is collected at the time of buying securities while exit load is charged at the time of sale. Existences of such charges erodes your net return which would be higher if you had invested directly. the investors should keep in mind that a high management fee does not guarantee good returns.
Information:
Once an investor starts trading on their own, they become aware of how the market works and this serves as an additional advantage to them. With the ability to interpret data and to understand market related information, investors can customize their portfolio based on their personal preferences. Funds managers on the other hand cannot possibly tailor the fund keeping in mind all your preferences.
Transparency:
When you are handling your portfolio, you know exactly how your portfolio is performing. In mutual funds, there is a risk of fund managers abusing their authority and indulging in practices such as window dressing to hide the actual performance of the fund. These unfair practices could also include selling the losers of the fund right before the end of the quarter to give an idea of better than actual performance.
Trade execution:
If you are a short-term trader then for you, trading directly is better than mutual funds. Even if you place your fund trade before the cut off time for the same day NAV, you’ll receive the same closing price NAV. By investing directly, you have full control of your trades and execution is much smoother.
Dilution of returns:
Its true that diversification is important for risk mitigation and mutual funds are known for this specific feature. However, too much dilution leads to dilution of returns. When you invest directly, you can allocate funds based on your risk appetite and return requirement.
Fund Valuation:
The calculation of fund valuation is too complicated for a layman investor to understand, it involves ratios such as Sharpe and Standard Deviation. If you are not well aware of these calculations you may not be able to understand the valuation of your fund. Hence, comparing your fund with others to understand how well its performing also gets difficult.