Investing · 7 min read
Mutual funds or direct stocks: which is right for you
Both own the same companies. The difference is who does the work, what it costs, and how much of your outcome depends on being right.
Krish Dalal
Founder and editor, PaisaExpert. Master's in Business Management, London. · Last updated 2026-08-13
The honest comparison
| Index mutual fund | Direct stocks | |
|---|---|---|
| Diversification | 50 to 500 companies in one purchase | Whatever you buy, usually too few |
| Research needed | None ongoing | Continuous, per company |
| Annual cost | 0.1% to 0.2% (index, Direct plan) | ₹0 brokerage at discount brokers |
| Demat account | Not required | Required |
| Minimum | ₹100 to ₹500 a month | Price of one share |
| Tax on gains | Same as equity, 12.5% long-term | Same, 12.5% long-term |
| Realistic outcome | Close to market return | Wide range, often below market |
The last row is the one that decides it. An index fund is engineered to deliver approximately the market return minus a very small fee, which is a narrow and predictable band. A self-managed stock portfolio produces a wide distribution of outcomes, and the median result for individual investors has historically sat below the index rather than above it. Concentrating your savings does not raise your expected return; it only widens the range.
Where active funds sit
Active mutual funds are the middle option: professional selection, but at 1 to 2 percent a year in the Direct plan, and a majority of Indian large-cap active funds have lagged their benchmark over long periods after fees. The compounding effect of that fee gap is large. Our index versus active comparison runs the numbers.
A sensible structure
- Core, 80 to 100 percent: one or two broad index funds, Direct plan, bought monthly and left alone.
- Satellite, 0 to 20 percent: direct stocks, only if you genuinely enjoy the research and can accept being wrong.
- Never: putting a majority of your savings into a handful of companies because a group chat was confident about them.
Frequently asked
What to do next
- Check whether your existing funds say Direct or Regular, and switch if needed.
- Make one broad index fund the core before adding anything else.
- Cap direct stocks at a fifth of the portfolio, and only if you enjoy the work.