What is the difference between
wealth baskets and mutual funds?
WHAT
SHOULD BE YOUR AIM?
SARASIJ MAJUMDER
A wealth basket consists of a carefully curated collection
of financial assets like Stocks and ETFs, selected by qualified experts. The wealth
baskets are built around a particular theme or investment strategy. On the
contrary, a Mutual Fund is a pooled fund, wherein investors can combine their
capital, which professional fund managers subsequently manage to invest in a
diversified range of assets.
Let’s explore the distinction in investment approach for an
investor. Let’s say an investor is trying to decide between investing in a
Stock Basket versus an Equity Mutual Fund, which one should the investor opt
for? Here are some of the key differences one must keep in mind
Custody and Management of Portfolio: First and foremost, it
is important to understand that a stock basket offers direct access to the
stocks, once an investor purchases the pre-compiled basket of stocks, all the
stocks in the basket are transferred to the investor’s demat account, further
any dividend from the stocks are also transferred to the investor. Mutual
Funds, on the other hand, do not transfer the individual stocks to the
investor, there is no need to create a demat account. Instead, the investors
hold units of the Mutual Fund at the Fund’s NAV, which is determined based on
the value of the underlying securities. As such, the stock basket will allow
more control over the investments. A mutual fund, however, does not allow the
investor to tailor the portfolio in any way, the stocks are selected and
managed by the fund manager based on the fund prospectus.
Risk and Expertise: While both Mutual Funds and Stock
baskets offer a ready-made portfolio, stock baskets offer a more concentrated
and direct exposure, and as such considered a higher risk-high reward
instrument compared to Mutual Funds. Stock baskets are better suited for
investors who have a certain degree of knowledge and expertise and have
high-risk tolerance. Mutual Funds on the other hand have restrictions on the
amount of risk they can take, there is sufficient diversification, there are internal
hedges in place, and there are constant reviews conducted to ensure that the
portfolio continues to perform as intended. These are appropriate for investors
with no market knowledge, and who have very low risk tolerance.
Diversification: A stock basket offers exposure to a
concentrated list of stocks, aligned with a specific theme, sector, or
investment ideology, hence it does not offer extensive diversification
benefits. It is more of a high-risk-high-reward tool. Mutual Fund on the other
hand provides significant diversification benefits. They can invest in over 100
companies across various sectors and market caps. This safeguards an investor
against concentration risk and market volatility. But, rate of reward also
reduces.
Fees: Fees for a stock basket can differ, depending on
whether the stock basket is compiled by the research team, or by an AI-based
software. The fees are charged, over and above the investment amount. For
Mutual Funds the Fund Manager’s fees are deducted from the overall pooled funds
and fund NAV is calculated accordingly.
Capital: Stock Baskets require an investor to purchase
each stock in the basket, as a result, the capital required to invest in a
stock basket tends to be higher. On the other hand, mutual funds are a pooled
investment vehicle, an investor will be purchasing units of the mutual fund, at
the NAV of the fund, as a result, an investor does not need much capital to get
started.
WAY AHEAD:--
1.0 Start with NIFTY FIFTY MF—Direct. SIP mode. Follow the
rise, and fall of stocks in the FUND, and Market movement. Gain experience.
2.0 After you gain some exposure, and read FUNDAMENTALS on
Investment in STOCK MARKET, develop a BASKET of Stocks, based on your own
study, and experience of best of NIFTY
FIFTY stocks. Shall not exceed 10 in number, and diversified over sectors.
3.0 OPEN A DEMAT ACCOUNT, ALLOCATE MONEY.
4.0 Start buying stocks in small quantities, and gain
experience, in buying, selling, moderating the basket. Gradually develop a GOOD
PORTFOLIO.
5.0 Alternate to 2 to 4 above:- Some investment companies
advise on BASKET. Be a member, and follow their advice. As for example—"Money
4 you” are not bad. There are more. Study, and select.
6.0 Time to time—I also publish basket in my BLOG—keep a
track, if you are interested.
NOTE:- BLOGGER has over 50 years of very successful exposure,
and experience in stock market. Some of
my friends call Blogger –INVESTMENT WIZZARD. The above write-up is based on
hand on personal expertise, and experience of Blogger.
IMAGE:-- NET.
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