My point is as both involve equities/debts(direct investment) in the main role, how is it that Equity/Debt is considered as a high returns/high risk venture and Mutual Fund a low risk/ low return venture? I know an Asset Management Company is behind a Mutual Fund scheme, but its presence should actually enhance the return in the sense it is being done through professionals?

So, What is the mechanism behind the two and what is the factor that governs the risk and the return factor in the two of them?

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    When you say Equity/Debt Investment ... are you refering to directly investing in the Markets ? and want to compare this with Mutual Funds ? – Dheer May 7 '12 at 10:32
  • @Dheer: Yes, I meant the same. – Abhishek Iyer May 7 '12 at 10:34

Just sticking to equities:
If you are investing directly in a share/stock, depending on various factors, you may have picked up a winner or to your dismay a loser. Say you just have Rs 10,000/- to invest, which stock would you buy?

If you don't know, then it’s better to buy a Mutual Fund.

Now if you say you would buy a few of everything, then even to purchase say Rs 5000/- worth of each stock in the NIFTY Index [50 companies] you would require at least an investment of 250,000/-. When you are investing directly you always have to buy in whole numbers, i.e. you can't buy 1/2 share or 1.6 share of some stock.

The way Mutual funds work is they take 10,000 from 250 people and invest in all the stocks. There are fund managers who's job is to pick good stocks, however even they cannot predict winners all the time. Normally a few of the picks become great winners, most are average, and a few are losers; this means that overall your returns are average VS if you had picked the winning stock.

The essential difference between you investing on your own and via mutual funds are:

  • Ticket size, you can be well diversified with small amount in a Mutual Fund. One needs large amount to be equally diversified by direct investments.
  • High Risk / High Return [or No Return] in direct investment Vs Low Risk Low Return in Mutual Fund
  • Need to be actively monitoring stocks and should know quite a few parameters. In Mutual funds, you do not need to be watching every bit of news and data every day.

It is good to begin with a Mutual Fund, and once you start understanding the stocks better you can invest directly into the equities.

The same logic holds true for Debt as well.

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