Things to consider before making the switch from mutual funds to stocks

People are increasingly shifting away from mutual funds and toward direct stock investments. Here are a few things to consider before making such a transition.

There has been a significant increase in the number of new demat accounts in India since the COVID-enforced lockdown. Though it is encouraging that more investors are changing their attention away from tangible assets such as real estate. 

However, investment in mutual fund investments has slowed down. This likely indicates that some investors are shifting away from mutual funds towards investing directly in stocks. 

Having said that, there are pros and downsides to investing directly in stocks. And now is the moment for investors to consider how they want to gain exposure to their equity investments, whether through direct stocks or equity mutual funds. In this post, we will go over several factors you should consider before making such a shift. 

Right benchmark 

When you invest in a mutual fund, you may compare the manager's performance to a relevant benchmark index as well as to that of its peers to determine how well they are doing. Even if you are moving to direct stock investing, it is important to do a suitable benchmarking of your stock portfolio against key indices and mutual funds.

This will assist you in understanding how your stock portfolio is performing. Remember that when you invest in mutual funds, you are supported by an experienced fund manager and a research team. But when you invest in direct stocks, you are backed by your own reading and analysis.

Diversification

Diversification is ensured through investing in mutual funds such as multi-cap funds. This diversity extends not only across sectors and stocks but also across market capitalisation. As a result, while investing in stocks, you must maintain proper diversification across sectors and market capitalisation.  

Diversified equity mutual funds have requirements that ensure they limit their exposure to individual stocks and use suitable risk management methods when taking sector exposure. As a result, when investing in direct stocks, you must have effective risk control measures in place.

Asset allocation

Furthermore, while contemplating investing in direct stocks, remember to keep the essentials in mind, such as allocating your capital to different assets. When investing in mutual funds, there are hybrid funds that handle asset allocation. You may also invest in equity and debt mutual funds to achieve optimal asset allocation, and rebalancing is simple. As a result, even when dealing with direct stocks, make sure you keep your asset allocation in line with your risk tolerance. 

Active management 

Direct investment in stocks necessitates active management, whereas mutual funds are managed by the fund management team. Furthermore, continuously managing your direct stock portfolio demands a significant amount of effort spent studying companies by avoiding the use of basic instruments such as prior stock performance. You must also manage your behavioural biases and make judgments intellectually rather than emotionally.