Trading (in equities) is totally tangent to mutual fund investing. Equity trading is highly speculative and traders take benefit of both rising and falling markets to enter and leave positions over a shorter time span. Traders may make handsome profits or high losses. Mutual Fund investors, on the other hand, look at generating a good risk adjusted returns over an extended period by simply investing and holding.
Seasoned stock traders trade “intra-day” i.e. they square up their positions the same day. They have in-depth knowledge of stock market movement. They reply on economic, political and international news and either buy or sell. There is a huge element of risk in trading and traders generally rely on their “gut feel” and ride the cycle. Trading, essentially, is predicting with reasonable accuracy the direction of the stock market (or individual stocks) and taking long or short positions. Mutual Fund investing is a simple and a long-drawn process of investing in highly regulated financial instruments. Mutual Fund investments seem boring but is low on risk and has high certainty of beating inflation.
In Mutual Fund investing risk is mitigated by the fund manager who uses various proven tools (like diversification) to mitigate risk and generate a higher alpha. A MF investor can further lower risk by investing in products like SIP and STP. An equity trader has to put up with a high dosage of risk and the probability of losing money is as high as 80%.
2- Investment of Time
A trader has to invest a lot of time in trading. An equity trader may remain glued to the screen to get a better entry or exit points. This investment in
time is totally done away with in case of Mutual Fund investments. All the necessary work of research, analysis etc is outsourced to the professional fund manager.
3. Time Horizon
Mutual Fund investments are long term investments. An MF investor needs to be patient to create wealth. Equity trader can create a lot of wealth in a single day or may even lose his shirt.
4 Profit Potential
Equity trading may create huge wealth for trader. Similarly, destruction of wealth too, is rapid and instantaneous. Successful traders may get triple- digit returns in a year. Mutual Funds on the other hand try to beat the benchmark indices and mitigate risk. Capital preservation is their first preference rather than conveying incredible returns.
5- Periodicity of investment
A mutual fund investor may invest monthly or quarterly. He may even stop his investments and withdraw the money (subject to a minor exit load and
some tax implications). However, to generate wealth an MF investor needs to stay invested for a long period of time. A trader on the other hand can exit the same day or keep his investments for a longer duration.
Which Approach is best for you?
An individual with deep pockets, speculative bent of mind, lot of time and exceptional knowledge of market cycles may try out Equity trading. A semi-active investor trying to better returns from conventional investment products like PF and FD should stick to the mutual fund route.