New stock investors are always faced with the dilemma – direct equity or mutual fund ? Let us explore it in this post. To start with we will divide the question into two:
What does it take to succeed in stock investment?
- Expertise: Buying a company’s stock is like buying a stake in its business. That needs a thorough understanding of valuation of the company, the sector that it operates it, financial results and other information of the company. There are a number of stock picking techniques which can broadly be divided into fundamental analysis (measuring the intrinsic value of a stock) and technical analysis (study of statistical data generated by market activities like past prices, trading volume etc). Besides there are a number of software, method, charts etc. to facilitate these analysis.
- Awareness: One has to be aware of myriad local and internal factor that have direct or indirect implications on the stock price – geo-political, liquidity concern, investor sentiment so on and so forth.
- Bandwidth: Stock investment is not a one off activity. Lots of time and effort has to go in – not only while picking a stock but for continuous tracking and taking actions whenever required. Occasional browsing of business channels in TV, trading site or relying on stock tips does not suffice.
- Faster response: In case of a sudden change in economic scenario what and how fast is investor’s reaction – what is its implication of an event on equity? What is the plan of action to maximize gain or minimize loss? How fast the plan can be put to action?
- Emotional detachment: Equity investment decisions are to be driven by logic and not by emotions. For example, for most people it’s difficult to admit mistake and cut loss when a wrong stock is invested in. When the stock price starts going down buying price, inner voice will start saying “I will sell once it come back to buying price”, when ideally you should move on and look for some other buying opportunity. It’s tough to admit own mistake !
Which option to choose?
Now that we have fair idea what it takes to succeed in stock investment, lets see if retail investors stand a chance. Typical profile of a retail investor is a doctor, engineer, business man, government employee etc. who is in his profession full time and wants to invest surplus money in stock market. While he/she is aware of long time benefits of stock investment, doesn’t have the time to understand the nuances.
Who all a retail investor has to compete against in direct equity investment? FIIs, Mutual Funds, experienced investors who are into fulltime stock investment backed by research and years of experience. Thus all odds are stacked against retail investors.
On the other hand mutual funds (MF) offer the following advantages to retail investors:
- MFs are managed by qualified fund managers who have required expertise and experience.
- MFs hire researchers who do deep dive analysis of different industries. These research findings are then used to identify right stocks to invest in. Thus MFs are not constrained by bandwidth or expertise.
- MFs often have direct access to company management and are briefed about company strategies and future plans.
- MF portfolios consist of stocks across different sectors and market cap based on the MF theme. Thus when you buy MF units, your investment gets diversified by default.
- Fund managers are likely to be more clinical and less emotional when it comes to taking tough but correct decisions.
Bottom line – If you can’t beat them, join them.
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