Stocks vs Mutual Funds: Where Should You Invest your ₹1 Crore?

Dated- 28th Sep, 2025

The age-old question of whether it is better to invest a significant sum of money in direct stocks or in mutual funds continues to dominate the minds of high-net-worth individuals, ambitious retail investors, and even those new to the wealth-building journey. When the figure in question is as substantial as ₹1 crore, the stakes naturally become higher. Every investor seeks not only security but also optimal returns that can compound steadily over time. The financial markets offer many opportunities, yet the choice between stocks and mutual funds is often a dilemma coloured by risk appetite, investment horizon, market knowledge, and behavioural discipline.

Recently, NDTV Profit, citing chartered accountant and wealth advisor Nitin Kaushik, presented an interesting comparative scenario. If an investor were to commit ₹1 crore directly to stocks without reinvesting dividends, the portfolio would likely grow to about ₹1.76 crore over a period of five years at a compound annual growth rate (CAGR) of 12 per cent. On the other hand, the same investment channelled into an index mutual fund with the option of dividend reinvestment could reach close to ₹1.8 crore in the same period. This comparison appears subtle on the surface but actually highlights the nuanced differences between direct equity investments and professionally managed funds. To fully appreciate these distinctions, one must analyse not only the raw numbers but also the underlying principles, behavioural tendencies, and long-term strategic advantages that each approach offers.

Investing in direct stocks has always been regarded as the purest form of equity market participation. The investor selects individual companies based on financial metrics, industry growth, valuation models, or even personal conviction. When executed correctly, direct stock investment can generate significant wealth creation opportunities. A carefully chosen portfolio of blue-chip companies or high-growth mid-cap firms has the potential to outperform indices and mutual funds. However, this path also demands rigorous research, continuous monitoring, and the courage to endure volatility. The figure of 12 per cent CAGR used in the projection is a fair average for equity markets, yet actual outcomes vary drastically depending on timing, sectoral allocation, and the investor’s ability to withstand short-term downturns.

One of the major limitations in the given scenario is the absence of dividend reinvestment. Dividends are often overlooked by investors who focus solely on capital appreciation, yet over long horizons they significantly contribute to compounding. By not reinvesting dividends, an investor in direct stocks essentially leaves money on the table. Over five years, this can create a measurable difference in portfolio size, as demonstrated by the comparison with index funds that automatically reinvest payouts. Moreover, dividends serve as a cushion during bearish phases, ensuring that the portfolio generates tangible cash flow even when valuations fluctuate. Ignoring this feature can tilt the scales against direct stock portfolios in cumulative growth projections.

Mutual funds, particularly index funds, provide a different kind of wealth-building mechanism. These instruments pool money from numerous investors and allocate it systematically across a basket of securities. The inherent diversification in mutual funds reduces the idiosyncratic risk associated with individual stocks. More importantly, professional management ensures that rebalancing, reinvestment, and compliance are executed seamlessly without requiring the investor’s constant attention. In the case highlighted by NDTV Profit, the reinvestment of dividends is the distinguishing factor that edges the mutual fund portfolio towards ₹1.8 crore, marginally higher than the direct stock outcome. This slight edge underscores the importance of disciplined compounding, which often outweighs the sporadic outperformance that direct equity enthusiasts chase.

The decision between stocks and mutual funds is not merely a numerical calculation but a psychological exercise as well. Investing ₹1 crore in direct equities can be daunting, especially when markets turn volatile. Sharp corrections of 15 to 20 per cent are not uncommon in equity cycles, and such declines can test the patience and confidence of even seasoned investors. Many retail investors panic during downturns, selling quality stocks at a loss and thereby eroding the potential of long-term compounding. Mutual funds, by contrast, shield investors from emotional overreactions through systematic investment processes and automated rebalancing. The investor simply witnesses the portfolio value fluctuate but does not feel compelled to take immediate action, which often protects long-term wealth creation.

Another factor worth considering is liquidity management. Direct stock portfolios can be customised to provide liquidity by selling selected holdings as needed, while mutual funds offer redemption facilities that ensure liquidity within standard settlement periods. Yet, direct stock selling requires careful timing to avoid adverse tax implications or selling at unfavourable market levels. Mutual funds, by virtue of their pooled structure, offer more predictable liquidity, often accompanied by mechanisms like systematic withdrawal plans that can simulate regular income streams without disturbing the compounding engine.

Taxation is another arena where the differences between the two investment avenues become evident. In India, long-term capital gains (LTCG) on equities are taxed at 10 per cent beyond the ₹1 lakh exemption limit, while dividends are added to the investor’s income and taxed according to the applicable slab. For mutual funds, the same LTCG rules apply, but dividend reinvestment effectively avoids immediate taxation, allowing for smoother compounding until redemption. While the tax impact may appear marginal on a yearly basis, over a five-year horizon with a sum as large as ₹1 crore, the cumulative difference can be significant. Investors often underestimate the silent erosion that taxation can cause, thereby underplaying the role of efficient structures like reinvestment-based mutual funds.

Behavioural finance sheds further light on why many investors prefer mutual funds over direct stocks. The human tendency to chase short-term gains, react impulsively to market news, or fall prey to herd behaviour frequently undermines rational decision-making. When managing a ₹1 crore stock portfolio, these tendencies can lead to overtrading, excessive brokerage costs, and suboptimal allocation. Mutual funds, particularly passively managed index funds, eliminate these pitfalls by adhering strictly to benchmark tracking. The lack of emotional interference in fund management enables steady returns that align with market averages, which, when compounded, create substantial wealth.

Despite these advantages, it would be unfair to dismiss the allure of direct equity investment altogether. A well-researched and disciplined stock picker can certainly generate returns surpassing mutual funds. High-quality companies with durable competitive advantages, if held patiently, can deliver multi-bagger returns that index funds may fail to replicate. However, such outcomes are exceptions rather than the norm. For most investors, the consistency of returns, psychological comfort, and disciplined reinvestment make mutual funds a more reliable option for long-term wealth creation, especially when the investment corpus is as large as ₹1 crore.

The projections of ₹1.76 crore versus ₹1.8 crore may appear marginal in numerical terms, but they highlight the principle that discipline often triumphs over sporadic brilliance. Investors must recognise that wealth creation is less about chasing the highest possible CAGR and more about sustaining compounding without disruption. The reinvestment of dividends, the absence of emotional biases, and the inherent diversification of mutual funds serve as crucial ingredients in this process. By comparison, direct stock investment resembles walking a tightrope where the rewards may be higher but so are the risks of missteps.

Another important angle is the time cost of managing investments. High-net-worth individuals with busy professional commitments may not have the time to scrutinise balance sheets, follow quarterly results, and react to regulatory developments. For such investors, mutual funds provide a stress-free, professional alternative that ensures steady growth while freeing up time for other pursuits. Conversely, investors with a passion for analysing businesses, tracking industry trends, and constructing portfolios may derive both intellectual satisfaction and superior returns from direct stock investing. The choice, therefore, must align not only with financial goals but also with lifestyle preferences.

Looking beyond the five-year horizon, the power of compounding becomes even more pronounced. The marginal difference between ₹1.76 crore and ₹1.8 crore today could expand substantially over 15 or 20 years, especially when compounded at double-digit rates. This reality reinforces the importance of reinvestment and disciplined allocation. For investors seeking generational wealth, mutual funds—particularly index funds with reinvestment options—offer a more predictable path. Direct equities, though rewarding for skilled investors, demand consistent effort and unwavering conviction to withstand the inevitable storms that markets unleash.

The broader economic environment also plays a role in shaping this decision. As India’s economy continues to expand, equity markets are expected to remain a primary driver of wealth creation. Mutual funds have already witnessed exponential growth in assets under management, reflecting the increasing trust of retail and institutional investors alike. Direct stock markets, meanwhile, continue to attract those willing to shoulder the responsibility of independent decision-making. In this evolving landscape, the choice between the two is less about absolute superiority and more about personal suitability.

Ultimately, whether it is better to invest ₹1 crore in stocks or mutual funds is a question with no one-size-fits-all answer. The figures shared by NDTV Profit provide a useful benchmark, but they must be interpreted in the context of individual goals, risk tolerance, and behavioural discipline. For investors who value professional management, diversification, and automatic reinvestment, mutual funds—particularly index funds—offer a safer, more consistent journey to wealth creation. For those with the expertise, time, and temperament to navigate market volatility, direct stocks remain an exciting avenue with the potential for outsized gains.

The decision, therefore, hinges on self-awareness. Investors must evaluate whether they possess the knowledge and emotional resilience to manage direct equities or whether they would benefit more from the structured discipline of mutual funds. Either way, the crucial lesson remains the same: compounding is the most powerful ally in wealth creation, and the reinvestment of returns is the silent force that separates successful investors from the rest. Whether the figure after five years is ₹1.76 crore or ₹1.8 crore, the principle of consistent, disciplined investment will always be the true determinant of long-term financial prosperity.

Summary:

Investing ₹1 crore in direct stocks can potentially grow to about ₹1.76 crore in five years at a 12% CAGR, while an index mutual fund with dividend reinvestment may reach around ₹1.8 crore. The slight difference reflects the power of disciplined compounding in mutual funds. Direct stocks can deliver higher returns if chosen wisely but demand time, research, and emotional resilience to handle volatility. Mutual funds, on the other hand, offer professional management, diversification, and reinvestment benefits, making them more reliable for most investors. The better option depends on individual risk appetite, knowledge, and long-term goals, but consistent compounding and reinvestment remain the real drivers of wealth creation.

Written by- Akash Paul.