Mutual funds are constantly marketed as the greatest option for long-term investments. You've probably seen ads where a man makes money over time by investing in mutual funds. However, the truth is rather different. The financial industry benefits more from mutual funds than do individual investors like you and me. The reason fund firms continue to promote mutual funds so vigorously is because they profit hugely from them, while investors only receive average returns.
In this blog, I’ll explain why mutual funds are not a great investment option, how fund managers use your money, and why investing in stocks directly is a better option if you have some capital and basic market knowledge.
Why Mutual Funds Are Not a Great Investment?
1. Poor returns in comparison to investing directly in stocks
If the stock market does well, the majority of mutual funds yield returns of between 10 and 15 percent annually. However, mutual funds may yield returns of less than 6%, which is even less than FD interest rates!
For instance, if you have invested 1 lakh in mutual fund before covid maybe during 2010, your portfolio may only be worth ₹1.3 to ₹1.5 lakh in 2019. But if you invested ₹1 lakh in a mutual fund in 2018., your portfolio value could be 3-4 lakh. So lesson is if there is crash in market , which occurs may arise due to any unforeseen situations and nifty gets crashed , you will get opportunity to multiply your money.
2. Unexpected Charges That Reduce Your Profits
Investing in mutual funds is not free. They impose a variety of costs that lower your returns:
Expense Ratio: Management costs take a portion of your investment each year. Some funds charge between two and three percent, which adds up over time.
Entry and Exit Load: Certain funds impose additional costs when you make an investment or take money out.
Brokerage & Transaction Fees: These expenses are deducted from your returns each time the fund manager purchases or sells stocks.
3. You Have No Say in Where Your Money Is Spent
You have no control over which stocks or bonds your money will be placed in when you purchase a mutual fund. You simply need to trust the fund management to make these choices for you.However, I would like to know if you would ever give someone ₹10 lakh and tell them, "Invest wherever you want, I won't ask any questions." No, correct? However, it is precisely what occurs with mutual funds.
You make the decisions about which stocks to purchase, when to sell, and portfolio management when you invest directly in equities.
4. Returns Are Completely Dependent on the Market
Unlike bank FDs, mutual funds don’t guarantee returns. If the stock market crashes, your mutual fund will also crash. If the market stays sideways for years, your investment will grow very slowly.
For example, in 2020 (COVID crash), many mutual funds gave negative returns. Even now, some investors haven’t recovered their losses fully.
5. Mutual Funds Make the Industry Rich, Not You
The real winners in mutual funds are fund houses, asset management companies (AMCs), and financial advisors. Their main goal is to keep you invested so that they can keep collecting fees every year, whether the market goes up or down.
Have you ever wondered why big fund houses never advise people to invest directly in stocks? It’s because they don’t make money if you invest on your own
6. Tax Disadvantages
If you withdraw your mutual fund investment within one year, you will pay 15% tax on the profits.
If you sell after one year, you will still have to pay 10% tax on profits above ₹1 lakh.Mutual fund dividends are also taxable, so your returns shrink even further.This tax is in addition to the fees you already pay!
How Your Money Is Used by Fund Managers
Your money doesn't sit around when you invest in mutual funds. It is invested in stocks, bonds, or other assets by the fund manager. Let's put this in plainer terms.
Systematic Investment Plan (SIP): Monthly Small Amounts
SIP refers to making a monthly fixed investment in a mutual fund. Because it averages out market fluctuations, it is marketed as a secure investment option. In actuality, however, SIP is merely a means for fund companies to get a consistent flow of income each month.
Example: Suppose 1 lakh people invest ₹5,000 per month in a fund through SIP. The fund manager gets ₹50 crore every month! They use this money to buy stocks, but do they invest in the best-performing stocks? No! They usually buy safe, well-known stocks that don’t grow fast.
One-Time Large Investment: Lumpsum Investment
Lumpsum is a large-scale, one-time investment. Fund managers utilize this money for purchases in bulk, but there is a risk that if you invest during a market peak, your money might not increase significantly for years.
Market corrections, for instance, might result in flat or even negative returns by 2024 if you made a lump sum investment in January 2022.
What Happens to This Money?
Stock Market (Equity Funds): Fund managers invest in stocks, primarily large-cap or blue-chip stocks that generate consistent returns rather than remarkable ones.
Debt Market (Debt Funds): A portion of the money is invested in government or corporate bonds, which provide lower yields (5-7%).
| Time Period | Average Equity Mutual Fund Return | Nifty 50 Return | Large-Cap Stocks |
|---|---|---|---|
| 5 Years (2018–2023) | ~11.5% CAGR | ~14.75% CAGR | ~13–15% CAGR |
| 10 Years (2013–2023) | ~12% CAGR | ~13.02% CAGR | ~14–16% CAGR |
Mutual Funds vs. Direct Stock Investment
If you are earning less than ₹5 lakh per year and cannot study the market, mutual funds may be okay for you. But if you have capital and are willing to learn, direct stock investment is a much better option.
Why Investing in Stocks is Better?
✅ Higher Returns – A well-chosen stock portfolio can give 30-50% returns per year, compared to 10-15% in mutual funds.
✅ Full Control – You decide which stocks to invest in.
✅ No Fees – No management fees or expense ratio.
✅ Better Flexibility – You can change your portfolio anytime based on market trends.
✅ Tax Efficiency – If you hold stocks for more than a year, the tax is much lower.
For example, if you had invested in stocks like Tata Motors, Reliance, or HDFC Bank in 2020, you would have tripled your money by 2024. No mutual fund can give such returns!
Typical Fee Structure:
| Fee Type | Equity Fund Range | Debt Fund Range |
|---|---|---|
| Expense Ratio | 1.0% to 2.5% annually | 0.5% to 1.5% |
| Entry Load | Rare now (mostly 0%) | N/A |
| Exit Load | 1% (if withdrawn <1 year) | 0–0.5% |
| Brokerage/Transaction Fees | Included in Expense Ratio | Included |
Example: If your mutual fund earns 12% but charges a 2% expense ratio, your net return drops to 10%, before taxes.
Do Fund Managers Add Value? Sometimes, Yes
Professional fund managers analyze stocks full-time, follow market trends, and manage risk through diversification.
Mutual Funds May Be Better For:
- People with little market knowledge
- Those who don’t have time to track the market
- Investors with smaller capital (<₹1–2 lakh)
- Retirement or long-term financial goals
Actively managed funds can outperform indexes in certain cases — especially small-cap and mid-cap funds — but this is not guaranteed.
What Are the Risks of Direct Stock Investing?
While you can make great returns by directly investing in stocks, it’s not easy. Beginners often:
- Follow tips blindly and lose money
- Panic sell during downturns
- Overtrade or ignore diversification
- Get emotional during market cycles
Unless you’re willing to learn and accept potential losses in the early phase, mutual funds may be a safer starting point.
When Mutual Funds Might Be the Right Choice
- You’re starting with small monthly SIPs (₹500–₹5,000)
- You don’t want to spend hours on research
- You need exposure to multiple sectors with lower risk
- You want to automate your investing habit
For example, funds like Nippon India Small Cap Fund or Axis Bluechip Fund have given 13–18% annual returns over the last 5–7 years, depending on market cycles.
When Direct Stocks Make Sense
- You have capital above ₹2–3 lakh
- You enjoy studying businesses, financials, and market trends
- You want full control over buying and selling decisions
- You are willing to accept high risk for high reward
If you invested ₹1 lakh in Tata Motors or Hindustan Aeronautics Ltd (HAL) in 2020, you could have over tripled your money by 2024 — much more than most mutual funds.
Final Thoughts – What’s Right for You?
Mutual funds are not scams – they’re a useful tool for many investors, especially those who are just starting out or want a hassle-free experience. However, they come with fees, limited control, and average returns.
Direct stock investing offers higher rewards, but it demands time, learning, and a strong risk appetite.
Your money should match your mindset.
-
No time or knowledge? 👉 Start with mutual funds or index funds.
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Have some capital + interest in learning? 👉 Gradually start investing in direct stocks.
Frequently Asked Questions (FAQs)
Is it risky to invest in a mutual fund?
Yes, mutual funds are risky because their returns depend on the stock market. If the market crashes, your investment value will drop.
Is it worth investing in mutual funds?
If you don’t have time to study stocks, mutual funds can be an option. But they give average returns compared to direct stock investing.
How do I invest in mutual funds?
You can invest through apps like Groww, Zerodha, or directly from fund house websites. Choose a mutual fund, decide SIP or lumpsum, and start investing.
Are mutual funds profitable?
Yes, but profits are lower compared to direct stock investing. Long-term returns are around 10-12% per year on average.
How do I choose the right mutual fund?
Check past performance, expense ratio, and fund manager’s track record. Avoid funds with high fees.
What is the difference between SIP and mutual fund?
SIP is a way to invest in mutual funds monthly. A mutual fund is an investment scheme that buys stocks or bonds with investors’ money.
What are the different types of mutual funds?
Equity Funds – Invest in stocks.
Debt Funds – Invest in bonds.
Hybrid Funds – Mix of stocks and bonds.
Index Funds – Track stock market indexes.
Invest only what you can keep for 5+ years. A good starting point is ₹5,000 per month in SIP.
Which is better, investment in LIC or mutual funds?
LIC is for insurance, not investment. If you want better returns, mutual funds are better. If you need insurance, buy a term plan.
Which is better: an ETF or a mutual fund?
ETFs are cheaper and track indexes directly, while mutual funds have higher fees and active management. ETFs are better for low-cost investing.
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