Direct investing vs. mutual funds

One of the biggest decisions that an investor in equity (stocks) will have to make is whether to invest directly in stocks or simply choose one (or more) mutual funds and let the fund manager do the stock picking for them.

Many have given this decision serious thought. And rightly so- it can have a large impact on your future wealth. But in fact it should be an easy decision to make if you have a sizeable amount of money to invest. And that decision is a no brainer – make direct investments in stocks!

But why? Well because…

1) management fees on mutual funds will eat into your capital over time. Investment mangers don’t get paid peanuts. Their offices tend to be rather grand too. And they certainly don’t drive cheap cars. So where does the money come from? Through charging their clients fees! Buy a mutual fund and there will likely be a buying fee. Sell the mutual fund and there will likely be a selling fee also. And every year you have to pay management fees. Over time these management fees add up to very considerable sums; fees which can be reduced significantly if you invest directly in stocks yourself.

2) it’s easy! Thanks to modern technology (the internet) it’s now much easier to manage your investments by yourself. Choose an online trading account and away you go. Furthermore, the trading fees/commissions are much lower now than they were in the past when buying or selling shares meant you had to have an account with a stockbroker.

3) direct investing is not (necessarily) more risky than mutual funds. Some people choose mutual funds because they think it is safer than direct investing. But this is not necessarily true. Yes stocks are risky by nature - share prices can of course go down as well as up. But you can create your “own” mutual fund by investing in at least 15-20 stocks. This should effectively remove the “specific” risk of investing in individual stocks. Choose blue chip stocks from across different industries. In the long run, there is no real reason to believe a fund manager will choose better performing stocks than you (unless they have extrasensory powers and can see into the future).

4) besides having to pay hefty fees, some mutual funds may engage in suspect practices. They may for example deliberately "churn" investments to create buying and selling commissions which, ultimately, you pay for. And they may even - for political or other reasons - invest in companies which have poor prospects.

So what are you waiting for? Open an online trading account soon!