Tips for buying Stocks, Mutual funds

Investors often face this dilemma -- should they invest in equity (stocks) directly or should they opt for the mutual fund route. The answer to us is pretty simple, really. However, for starters, let us examine the various costs involved in adopting any one route.

Comparative Analysis between Equities & MFs

Transactions	Equities	Equity-based MFs
Purchase � Brokerage	Around 0.5%	Nil
Securities Transaction Tax	0.125%	Nil
Entry Load	Nil	Around 2%
Sale � Brokerage	Around 0.5%	Nil
STT	0.125%	0.25%
Dividend -- Income Tax	Nil	Nil
Distribution Tax	14.025%	Nil
Capital Gains -- Short-term	10.2%	10.2%
Long-term	Nil	Nil
Loads	Nil	Loads may be applicable on entry or early exits
Effect of Dividend on Price / NAV	Full Reduction	Full Reduction
Annual Recurring expenses of AMC	Around 1%	Around 2.25%
Risk	High	Medium

If you compare the two avenues, item by item, you will find at least on the cost front, both are more or less even:

1. No brokerage for mutual funds either on purchase or on sale. This is more than offset by the entry/exit loads and AMC fees of mutual funds.

2. No Securities Transaction Tax for mutual funds during purchase. This is compensated by double the STT at sale.

3. Mutual funds are exempt from Dividend Distribution Tax (DDT) of 14.025%! But let us not get lured by this. DDT is charged to mutual funds when they receive dividends on the shares they own in the portfolio. Charging DDT to you when you receive the dividend from the mutual funds would be double taxation.

So this brings us back to square one. What does the investor do?

As mentioned in the beginning of the article, the answer is simple and it doesn't depend upon the expense or the tax structure -- instead it depends upon you.

There are more than 5,000 stocks out there out of which around 2,500 are actively traded. If you know any of these 2,500 stocks in detail -- that is, if you understand the business dynamics and the prospects of any industry and the companies within that industry -- then by all means you should invest directly.

For example, a friend of ours works with a pharma company. He has had decades of experience within the industry and knows the positives and negatives of each company within the industry fairly well. He would be a fool to waste such knowledge, thus very appropriately most of his stock investments are in the pharma sector.

Incidentally, the returns on his portfolio beat any pharma fund hollow. However, for exposure to the rest of the industries in the economy, he opts for the mutual fund route. Needless to add, his portfolio is thriving.

Similarly, one may be working in the auto, cement, engineering or even IT, use your inside knowledge -- and by inside knowledge we don't mean inside information, we mean use your domain expertise of your industry -- to invest well. Do not touch any stock that you don't know the business of too well.

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