Stocks vs Equity Fund vs Index Fund 

Bangalore : Equity investing is straightforward, but success needs endurance, resilience, and the correct amount of resolve. Over the past several years, particularly post-Covid-19, the globe has seen big economic events like as the Russia-Ukraine conflict, increasing inflation, the 2-year US treasury rates reaching a 16-year high, commodity prices skyrocketing, and China’s ongoing lockdowns, among others. These geopolitical tensions triggered a worldwide supply chain problem. Despite this, the Indian markets outperformed the rest of the world’s main equities markets. The US Dow Jones decreased roughly 4.05% in FY23, while the Hang Seng plummeted 7.2%. The Nifty, on the other hand, stayed unchanged at -0.6%. The Indian economy was undoubtedly in a better macroeconomic position than other nations.

In reality, 2.5 crore new demat accounts were established in the Indian equities market in FY23. The sector has expanded from 3.59 billion demat accounts in FY19 to 11.45 billion demat accounts in FY23. On December 1, 2022, the DIIs drove the market to new highs of 18887. They invested more than 2.5 lakh crore in the cash market. The FIIs were afraid of losing out and began putting money in from March 2023 onwards. In Q1FY24 (Apr-Jun 2023), FIIs poured in more over Rs. 60,800 crores in the cash market, propelling the market to fresh lifetime highs of above 19700 levels.

Equity returns may be much greater than equity/index fund returns in terms of risk-return; nevertheless, the investor must also recognise the level of price risk involved. For example, if someone invests Rs. 10 lakh in a stock that falls by 10%, the capital erosion will be Rs. 1 lakh; however, if the same investor invested in an equity fund, the fund would have fallen by only 2-3% because it has a lower concentration risk (at least 25 stocks in the fund scheme), resulting in diversification benefit. In reality, if the investment had been put in an index fund, such as a Nifty 50 index fund comprised of the largest market-cap weighted stocks, the volatility risk would have been significantly reduced, with the prospect of flat to positive returns.

Consider this extensive comparison, in which investing on just Cipla stock would have resulted in a 6.75% return. If someone had depended on a midcap equity fund like ICICI Midcap Select during the previous 12 months, he or she would have generated a 15.58% gain. If the money had been invested in a passive index fund, the returns would have been staggering: 21%.

Over the previous several years, the mutual fund sector has also played a role in increasing the financial savings of the country’s ordinary investors. Over the previous decade, the AUM of the Indian mutual fund sector has increased fivefold, from Rs. 8.1 lakh crore in June 2013 to Rs. 44.39 lakh crore in June 2023. Furthermore, the number of mutual fund folios has increased to 14.91 crore in June 2023, up from 14.73 crore in May 2023. Over the previous four years, SIP contributions have increased by more than 68%, from Rs. 92,700 cr (FY19) to about Rs. 1,56,000 cr (FY23). In fact, in May 2023, the SIP monthly contribution reached an all-time high of Rs. 14,749 cr.

The manner an investor engages in the market is entirely dependent on their market knowledge, time commitment, and risk tolerance. If a person has finished the necessary schooling (for example, a CFA/CA/MBA Finance) or has expertise in analysing financial statements, judging corporate governance and its red flags, and so on, he or she may invest directly in stocks. However, if the investor is risk-averse regardless of degree or experience, he or she should choose an equity/index fund.

Equity funds are a kind of active investing in which the fund management attempts to produce alpha and outperform the benchmark index, resulting in a higher cost ratio for the client. Index funds, on the other hand, are a passive type of investing in which the function of a fund manager is reduced since the fund directly reflects the results of an index, such as the Nifty 50, resulting in a substantially lower cost ratio.

As a result, the investor must decide whether to invest in stocks, equity funds, or index funds. Although each of these devices has advantages and disadvantages, their applicability varies.

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(This article written by Sidhavelayutham, CEO & Founder, Alice Blue)