Comparison of investing in Mutual Funds and Share-trading, Other Topics

[Jignesh Desai]

Comparison of Mutual Fund Returns versus Share-trading Returns :-

To earn returns from Equity , an individual has the choice of investing in Mutual Funds or trading in shares & earning profit (Of course , apart from many other choices also , like PMS , Smallcase ,etc) .

In the case of investing in Mutual Funds , he has many choices . For example depending on what type of Mutual Fund he thinks is most correct for the current scenario , he can invest in that type of Fund . For e.g. , if he wants to take less risk & volatility , he can select a Large Cap Fund . If he thinks it is right time to get into Mid Caps , he can select a Mid Cap Fund , If he thinks the time is correct for Value-based investing , he can select a Value-oriented strategy Fund . If he still wants lesser volatility , he can select an Equity & Debt Fund (Balanced Fund) , If he wants to diversify amongst different types of assets , he can go for a multi-asset Fund . If he likes tactical allocation , he can select a Dynamic Asset Allocation Fund , If he wants to save on the expenses , he can pick an ETF or Index Fund . Since past few years there are also funds that invest in Chinese Equities , USA Equities , etc . Also , in a Mutual Fund , his money is being managed by the Fund manager , who is an expert in his field .

When he invests in a Mutual Fund , he would be charged a certain percentage as the expense ratio , which would be anywhere between 0.05% to 2.25% depending on what type of fund he has selected & whether he has invested in the regular option or direct option . However , as far as taxation is concerned , he can rest assured that for Long Term Gains (if he held the units for more than a year before redemption) from Equity Mutual Funds , he would be taxed at 10 % & for short-term gains (if he redeems within a year) , at 15 % .

Now , if , instead of investing the same money in Mutual Funds , he trades with this money in shares . Let's consider the pros & cons . If he decides to trade through a full-fledged broker (Many people feel uncomfortable trading through "discount brokers" ) the brokerage + taxes that he has to pay on each delivery -based trade is approximately 0.7 % of the value of the trade . So , just 2 purchases & 1 Sale of the whole amount of money would equal the whole year's charges in case of the most expensive Equity Mutual Funds (0.70% * 3 = 2.10 % is almost equal to the 2.25 % charged by the most expensive regular mutual funds) . Apart from this , there is also a slim risk , that in case his turnover exceeds a certain amount , or if he trades very frequently , the income tax authorities may deem all the profits that he earns from share-trading as business income . And then he would be charged at the marginal slab rate that he falls into (which could be anywhere between 0 to 30% ) . In case if he is falling in the 30 % bracket , he would be taxed at 30 % instead of 15% (Short Term Capital Gain rate for Equity) . Plus , in case of share - trading , he would have to give time to the share terminal between 9.15 am to 3.30 p.m. everyday from Monday to Friday .

So , considering that in Mutual Funds , he does not have to devote 6.15 hours every day , from Monday to Friday , & just periodic monitoring of the performance of his investments would be enough , net of ALL EXPENSES IN BOTH THE CASES , how much extra POST-TAX returns from the share-trading should he earn , on an annual basis , to justify the extra time investment he has to make in case of share-trading as opposed to investing in Mutual Funds ?

Posts / Replies

[Ganeshan Kalyani]

Sir, any specific query?