Mutual fund (MF) scheme issued by mutual fund
houses, collects money from various investors who wish to invest in equities.
The fund houses then invest the money collected across various financial
instruments to generate high returns. The MFs are professionally
managed. You as an investor also have an option to buy these stocks
directly from the stock market.
There are various benefits of investing through
mutual funds, which may not be available if one invests directly through
shares. Direct equity investment can be very rewarding, however, the risk
of loss in direct equity is also very high. It is not easy to understand
equity. One needs to understand the underlying business and industry the
business operates in, before investing in equity (stocks).
Most important factors to invest in equities are
- Do you understand equities?
- Do you understand the underlying business and
how it earns money?
- Can you figure out the fair value of that
business?
- Do you have time to trade & track stocks?
- Do you have discipline to continually
allocate time to make investment decisions?
Do you want to create wealth in the long term or you want few
gains here and there. The most difficult thing in the stock market is to sit
tight on your profits. The moment you see your capital doubles, you will sell.
Also, when your stock is down, you will try to average it. Investing
is less of intelligence and more of Psychology.
Another problem in direct stocks is the sizing. You
can make money in direct investing if your allocation to good stocks is very
high. Even if your stock rises 4-5 times but your allocation is not large
enough, your gains will be limited. You will not be able to increase your
allocation in rising stocks. Can you increase your allocation in a stock which
has risen 2-3 times its buying price. More often than not, you will
sell it before it gives you substantial gains. You will always increase
your allocation in stocks which are falling. That's the whole tragedy of direct
investing.
Most of the investors buy on tips which you keep getting every day
on the mobile. Even, if you follow some market expert for stock
buying, he may tell you some good shares which are looking good at that point
but he may change his view after a while due to many reasons associated with
the stock. So, if you want to be in the business of direct stocks then you will
have to rely on yourself and not on anybody else. Experts keep changing their
views as per the market conditions. But to rely on yourself for buying direct
stocks is easier said than done. You need to understand the market
thoroughly and must have seen 2-3 bad cycles.
Also, you should be able to at least, I say ATLEAST, read and
understand the balance sheet, profit and loss account and cash flow statement
of the company. This is the minimum requirement of direct stock
investing.
Mutual fund investing is low ticket size. You can
start with capital as low as Rs 500/-. In direct equities you require
higher capital. Also, exit from mutual fund is easier than in stocks.
Investors may not have the necessary skills to
identify the right stocks. Not everyone can dedicate time to do research.
Mutual funds, therefore, offer investors the expertise of fund managers with a
whole research team. Also, mutual fund investing is easy, less
emotional, disciplined, cheap and tax efficient.
It is very easy to have access to information and knowledge about
the market and companies but to become wise out of this information and
knowledge is MOST DIFFICULT and more often than not, it will be the
opposite.
Look at the mutual funds. You will get 14-15% compound
annual growth rate without losing your sleep and without looking at the market
everyday. The problem in direct investing is the attachment with the
stock. You can't sit idle with the stock price. If it goes up, you will sell
and if it goes down, you buy and keep averaging. So, over a period of time, you
will sell all your good stocks and accumulate junk stocks. Also, buying and
selling entails brokerage charges and capital gains. So, your profits will
further reduce.
Mutual funds do not have stock price but net asset value (NAV)
which no body tracks. In fact, whenever the market falls, due to your SIPs
investing, you accumulate more units of mutual fund Scheme because of the cheap
NAV. So, you can really sit tight and can keep increasing your allocation
in your mutual funds for many years. That is where the power of compounding
kicks in.
All humans have urges. Stock investing can also be an urge. If you
really want to indulge in direct stocks then allocate 10-20% of your corpus in
direct stocks and rest can go to mutual funds. Compare your returns after 3-4
years. If you have made more money in stocks then increase your allocation
slowly in stocks.
Also, to reach a target of ₹2 Crores in 20 years, you need to
invest ₹10,000/- per month in good quality 2-3 mutual funds with an annual
increment of 1,000/- which is easily achievable.
Also, to reach a target of ₹5 Crores in 20 years, you need to
invest ₹30,000/- per month in good quality 4-5 mutual funds with an
annual increment of ₹2,000/-. This can be easily done without losing your peace
of mind.
DISCLAIMER : The opinion expressed above is our
personal opinion and in no way recommendation of
buying or selling. You must consult your
financial advisor before making any fresh investment in
equity market. Please also note that past performance of
funds does not guarantee future returns.
We are also operating a Mutual Fund Distribution Firm INVESTOR FIRST. For better understanding of mutual fund investments or Investment
Planning for future targets, you can contact us at the following address :
Website: https://investorfirst.co.in/
Head Office : 2nd Floor, 159/129/96, Sri Krishna Tower, Near Hotel Ramada,
Ballupur Road, Dehradun-248001, Uttarakhand.
Contact Numbers: +91-9164046333 (personal), +91-8410116967(off),
+91-6397808084(off), +91-1353520386(off).
Mail Address: sangam157@gmail.com, info@investorfirst.co.in
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