Skip to main content

Investing: Direct Stocks or Mutual Funds?

At a time when both Indian and global equity markets are being plagued by bad news, retail investors aren't sure of the strategy they need to adopt. Should they bet on the equity markets now or take the safe route of mutual funds? This is a loaded question. This does not have a simple yes or no answer and depends on a persons risk taking ability, return expectations combined with the ability and inclination to manage a share portfolio, as opposed to simply investing in mutual fund schemes.

However, if the same question is posed in the context of the current downward slide in the markets, the answer could be far more definite.

Consider this… can a person used to swimming in a pool switch to swimming in an ocean or river at will? The answer seems self-evident as swimming in a pool is far easier as it is a controlled environment. Swimming in a river or ocean is far more difficult as one has to contend with the surging waters, currents and whirlpools.

There are of course other lurking dangers like alligators, sharks and so on, which can cause harm. So, even those who swim regularly in pools aren't always willing to jump into a river or ocean. Apart from the perils involved, swimming in the open, also calls for higher level of skills. It even involves different, special skills, not required in a pool.

MUTUAL FUNDS

That is precisely the difference between investing in mutual funds and equity. Mutual fund investments are far safer as there is a fund manager who takes care of the investments and whose only mandate is to monitor and manage the investments that his fund makes. Not much knowledge is required from the investors side, except for the due diligence on selecting an appropriate fund to invest, in-line with their requirements.

Most investors, are not even aware of who the fund manger is, but a look at the kind of returns the fund manages over the years, and you can judge his work. Good managers will use extensive information from their research to pick the best stocks. Over time, the investor just needs to check if the fund manager is sticking to the mandate and is delivering a return superior to the corresponding index and the category, enough to justify the charges.

But not all investors want to depend on the fund manager's discretion. Such an investor may want to invest in the broad economy instead. He could invest in index funds. This is even simpler, as the investor does not have to spend too much time studying what to invest in. All he needs to know is which index, he should like to invest in and what the charges are for managing it.

Savvy investors may also want to go through websites that rate mutual funds on various parameters.

EQUITY

Equity, however, is a different ball game. Here, the investor needs to analyse and choose the equity shares to invest in. This is easier said than done. Choosing a good equity share requires broad understanding of the economy, sectors and the company itself. One has to go through the financials of the company like balance sheet, profit and loss account as well as all other parameters that indicate the health of the enterprise.

As individual investors, most people do not have the capability nor the inclination to do this. Unless, they have a good broker or advisor, they may end up taking or simply choose blue chips. you could end up a sucker, if you have been taking tips from the wrong person.

Again the latter may also not be the best investment decision since there are many good buys even among the smaller stocks. By avoiding them totally, you may miss the opportunity to buy potential multi-baggers. You might as well have, invested in an index funds if you want to go for blue chips only.

STRATEGY

Given these facts, investors want to know what changes they need to introduce in their strategy. The proximate cause is that an investor hears that some stocks prices have come to 50 per cent levels of what it was prevailing at, a year ago. Investors will also find blue chips among these. Most market experts have been asking investors to buy at such points, given that these stocks may not be available at such attractive valuations in a upward moving market. That gets investors salivating.

But if there are major drops, there would be reasons for it. Assuming that it has dropped due to market conditions would be wrong. GTL Infra and KS Oils are cases in the point. For KS Oils the 52 week High/low is 63.1 and 7.7 and that for GTL Infra is 48/ 10.5. The drops here may make one salivate and invest in them; but these companies prices have come down because the equity shares pledged have been sold to recover the money.

That hints at a cash flow problem for these companies and hence caution is advised. What this illustrates is that, just a price drop is not sufficient reason for picking up a stock. Unfortunately, in a falling market, investors who follow the herd mentality, may end up picking up stocks that should be best left untouched.

Investments are done with a purpose.

Admittedly, there is more than one route to get to ones goal. Mutual funds allow investments through either lump sum payments or systematic investment plans. One could follow similar investment patterns for equity investing too. Either ways, staying invested for longer periods is the only way to make money from equities as well as mutual funds.

However, changing from equity to mutual funds or vice versa, may not be warranted just to take advantage of a falling market. Those investing in mutual funds should continue to stay invested there for the fund manager would be able to take advantage of the situation, much better than any individual investor.

Those who have been investing in equities, however will have enough knowledge to pick and choose the right investments. For them, equity markets at this point provides great opportunities. Equity investors can consider mutual funds, to bring down their risk .In summary, one need not change the investment strategy due to market conditions. Rather, it is better to think it out before opting for a strategy. And once done, stick to ones strategy - be it equity or mutual fund investing.
 

Popular posts from this blog

Save Tax With Mutual Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300       Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year. Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes ·        Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years. ·        First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes un...
Read more

Buying a Used Car

Invest in Mutual Funds Online Download Mutual Fund Application Forms   Pre-owned car can make sense in these inflationary times. But buying one can be trickier than getting a new vehicle    If you are thinking of buying a car but are worried about the rising inflation and higher EMIs eating into your budget, you should consider buying a used car. For those learning to drive, the general advice is that they should hone their driving skills in a used car. However, buying a used car is not an easy task. Though a used car costs less, there are a lot of aspects to be considered while buying one. You should do your due diligence before buying such a car. For example, two cars of the same model would carry two different prices. The difference in price could be on account of the age of the car, how many people have driven, etc. First Fix Your Budget Since used cars are available in a wide variety of models and prices, the starting point would be to determine your budget befor...
Read more

How much to invest in gold ?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) Let your motivation dictate the share of the yellow metal in your portfolio Enough has been said and written about gold as an investment option. The latest argument is that the craze for gold among Indian households is endangering our country's balance of payments. The policymakers are busy trying to find ways of discouraging investment in gold, but if households keep the common good in mind, they would be paying the market price for gas cylinders as they do for, say, their mobile phone bills. After all, private decisions are driven by private motives. So, how should a household look at gold from its own perspective? Gold is primarily acquired for its merit as a store of value. Even if the worst crisis hits a family, the gold that it holds could be put to use anywhere in th...
Read more

Debt Mutual Funds Best Fixed Income Investments

Debt Mutual Funds - Invest Online     In the last one year, except for a select few sectoral funds and small cap funds, not many of the equity funds have given great returns. On the other hand, debt funds have done relatively well in terms of returns. So far in the new year too, the stock market has been extremely volatile, pushing investors to look for safer havens. In this context, debt funds are looking safer bets for those investors who do not have the appetite for higher level of volatility. Investors who look for a regular income stream, also look at fixed income products like debt funds, bank fixed deposits and post office monthly income schemes.  Among the fixed income products, debt funds score over others because of chances of higher return, has nearly similar level of risks and liquidity. According to Shah, people looking for regular income could opt for a systematic withdrawal plan (SWP) in debt funds , which, if done judi ciously could also save on taxes. Shah explaine...
Read more

Diversification is key to gain more

Even those who prefer debt for its safety are looking at more options    It is not often that you find more than a couple of asset classes producing good returns at the same time. Invariably, assets such as gold and equity don't perform in tandem, and hence it was easier to allocate to them in line with the risk profile of the investors. In the last couple of quarters, however, more than one asset has turned attractive - gold, debt and equity. In line with the trend, you even have monthly income plans with a combination of more than two assets.    In the past, those who stuck to debt were a different class of investors who didn't wish to take risk with their money. The changing lifecycles and the growing integration of investment markets across the globe have pushed even individual investors to embrace the concept of asset allocation. Hence, you have individuals who were using debt to park profits being prepared to take advantage of other assets.    For instance, when the...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now