Don’t be “tempted” to buy shares. Buy MFs!

It is but natural to be attracted towards equity. The stories – some true and some fictitious – of people having become millionaires overnight, are bound to tempt anyone. But let’s face facts! Equity is not easy money; equity markets are not everyone’s cup of tea.

It’s our hard-earned money, which is at stake. So let’s be very objective about it.

Do we have sufficient capital?

It is plain common sense that a diversified portfolio with say 15-20 stocks is less risky than a concentrated portfolio with say only 3-4 stocks.

However, for a common investor, capital is usually limited. With this limited money supply it will not be possible for him to adequately diversify his portfolio. In such circumstances, MFs offer an alternative to be part of a well-diversified portfolio even with just Rs.100.

Of course, a concentrated portfolio could deliver super-normal returns. But then the risk is also very high. This high-risk high-reward strategy would not be suitable for a vast majority of common investors. It only suits a few select expert investors with very high net-worth.

Secondly, with limited capital it is difficult to buy high-priced shares say Reliance @2500 or Infosys @2000, etc. This forces us to buy low price shares. (Note that we are just talking ‘price’ here. This should not be confused with ‘value’. That is a subject matter for another discussion). Generally high-priced shares will be good stocks and low-priced shares may not be so good stocks. Thus, with limited capital we could end up with a substandard portfolio.

Given the fact that limited capital could mean concentrated and inferior portfolio, MFs may be a more preferable route for those who cannot bring in adequate money for investment.

Do we have sufficient knowledge & expertise?

Ok, let’s be very honest and frank here.

• Do we have more knowledge about companies, economies, markets, etc. than a well-qualified and experienced professional fund manager?
• Can we read the balance sheets as easily as a fund manager and draw right conclusions?
• Can we identify the upcoming sectors? Or those that could face downturn?
• Do we have the soft skills such as risk appetite, intuition, discipline, patience and such other qualities, which distinguish a good manager/investor from a bad manager/investor?

In short, are we smarter than the fund manager?

In most cases, the answer would be ‘No’.

Then tell me why we, as amateurs, should enter the difficult terrain of equity markets, when we have the opportunity to let the best man (and woman) do the job for us?

Do we have sufficient time & resources?

For a moment let’s us assume that we have (a) big money to invest and (b) also a very good understanding of the markets.

But do we have the 3rd important criteria i.e. Time & Resources?

There are more than 6000 listed companies. Some of them are successful, some were successful and some will be successful. We need to buy stocks that will be successful; we need to get out of those whose successful phase is about to end; and we need to hold on to those who are still in the success phase. This timing is very critical for making money.

The problem is that this list keeps changing quite often and it requires continuous research to keep oneself updated. How many of us have the time to read hundreds of annual reports? In fact, how many of us can get hold of all these reports? Moreover, annual reports are not everything? How many of us can visit companies, meet their management, discuss their plans, etc.? What about meeting independent industry experts? How many sectors can we be expert in? Even if we could do all this, can it be done regularly – day after day, year after year?

So who’s better placed to do a good research – a MF with its’ full-fledged research team or we, who are as it is too busy with our own jobs?

Contrary to all this, choosing MFs is a relatively much simpler job. Also, it doesn’t require close monitoring. Thus it becomes the best option for most of us to enjoy the fruits of equity, without having to devote too much time, money and effort.

- Sanjay Matai

The author is an investment advisor and promoter of wealtharchitects.in. He can be reached at sanjay.matai@moneycontrol.com.

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