Are Mutual Funds Safer Than Direct Equities Against Market Downturns?

Ever wondered why investors choose to put their hard-earned money into mutual funds over equity shares? Is it because they are considered a safer bet in the event of a stock market crash? Everyone knows a financial collapse can trigger a broad decline in stock prices across the board and mutual funds are no exception.A bear phase will affect the net asset value (NAV) of your mutual fund's portfolio. While an element of risk persists, certain features enhance the safety quotient of this investment vehicle. Let’s dwell on how mutual funds can help ride things out during a crisis.

• Diversification in Portfolio Mutual funds offer diversification by investing money in multiple securities. This minimises risk exposure and reduces the impact of market volatility. If one of the holdings plummets, the performance of others in the fund can offset the loss.In short, you won't see your entire portfolio clobbered, and returns hit when the market heads south.Direct investing lacks the advantage of diversification; hence the performance of one scheme cannot compensate for another, which makes this avenue vulnerable to unpredictable market conditions.
• Expert Management When going directly with stock, investors often end up relying on tips, gut feeling, and hearsay for selection as they don't have the time or inclination to conduct research, examine fundamentals, or understand the market dynamics.Lacking expertise in the domain, they are often baffled by the prevailing conditions during a market meltdown. This is where mutual funds score. Managed by highly skilled professionals with proficiency in making informed decisions during challenging times, mutual funds can help cushion the blow of falling prices by balancing out losses.
• Well-regulated Investment Another reason that makes mutual funds safe is that they are extremely well regulated. The investment route is backed by a legal framework and comes under the purview of the capital market regulator Securities and Exchange Board of India (SEBI). What's more, mutual funds houses have to follow certain guidelines laid down by SEBI like publishing a daily NAV and disclosing the fund's monthly portfolio. This kind of transparency favours investors as it safeguards their interests and reduces the odds of fraud.
• Stable Returns Perhaps the greatest benefit of mutual funds is that they ensure stable returns. While direct equity is considered a high-reward investment option that garners good returns, it also carries a greater risk.During a financial collapse, the stock value and price can touch rock-bottom within a matter of days due to reactionary panic selling.
• Rupee Cost Averaging Through SIPs Mutual funds give you the option to invest through Systematic Investment Plans (SIPs). Thus, you invest a fixed amount of money into a mutual fund periodically and, you are allocated units of it based on the NAV of the fund.Now how does it help during a downturn? One of the best advantages of SIPs is that it offers Rupee Cost Averaging (RCA). Thus, you get more fund units when the value decreases and lesser units as the market reaches its peak. This helps to average out the purchase cost of fund units, helping you generate more stable returns over the long-term.

Investing directly into equity is not everyone's cup of tea as it is a complex procedure with too many dynamics. Even seasoned investors find it tough to manage their equity portfolios during volatile periods. In contrast, mutual funds have a slight edge as they are professionally managed, diversified, and well-structured products with the potential to deliver risk-adjusted returns and weather market bump effectively.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.