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I often read or hear the argument that investing directly in stocks is better than investing in equity mutual funds. Let's examine the pros and cons of each option based on the following criteria: investor experience/comfort level, fees, degree of control and risk vs. reward.
For the new and/or timid investor any investment can be intimidating. Mutual funds offer the security of not having to know the ins and outs of the stock market. Investors don't need to choose which stocks to buy or research about the different companies listed in the PSE. Mutual fund investing is for those who don't have the time or inclination to learn about stock investing. It's a "set and forget" type of investment.
For the more experienced investor who wants to learn more stock investing is a natural next step. In fact, the more adventurous investor can start investing directly in stocks. This requires a more curious investor with perhaps a higher risk tolerance.
When it comes to fees stock investing beats mutual funds. Let's look at buying: A popular online stock trading platform charges 0.25% commission, plus VAT, PSE fee of 0.005%, and a 0.01% SCCP* fee. That means 0.295% for buying stocks, or P29.50 for a P10,000 investment. Contrast that with a mutual fund front-end load of 2%+VAT: P224 for a P10,000 investment! That doesn't even include the annual fee! Even with zero sales load and a 1.5% annual fee, that still comes out to a charge of P168.
What about selling shares or redeeming mutual funds? The stock trading charges are identical except for a 0.5% sales tax. That means selling P10000 worth of shares will be charged P79.50. Adding that to the previous charge for buying the shares in the first place, the result is still lower than the mutual fund annual fee. Factor in the sales loads and it's clear that stock investing is "less expensive" than mutual fund investing.
Investing in stocks offers a greater degree of control than mutual funds. Investors can choose which stocks to buy or sell. With mutual funds you only buy shares of the fund. The MF company decides which stocks to buy or sell and when.
It may be said that investing directly in stocks is riskier than investing in mutual funds. Stock investing requires a lot of research and a lot of discipline. Investing without knowledge is asking for trouble. Speculation, wishful thinking, and the twin emotions fear and greed are other factors that lead to huge losses. Risk can be minimized by careful study, a well-thought out plan, and sticking to that plan. If I were to invest in stocks, I'd invest in companies listed on the PSE index. That way I can mirror the index performance. Last year most equity mutual funds beat the index performance, but that doesn't happen every year. It's very difficult to beat the market consistently so over the long term it might be better to invest in the index listed stocks.
At this time I am seriously considering investing in stocks. The primary reason is the lower fees. I am currently invested in an equity mutual fund. I don't plan on pulling out my investment, but I think investing in stocks would be a good addition to my portfolio. There are two popular online trading platforms: BPI Trade and Citisec Online. I'll compare the two in a future post.
PSE - Philippine Stock Exchange
SCCP - Securities Clearing Corporation of the Philippines