Should investors always choose MF over direct equity?
It is often said that small investors (retail investors) should not venture into equity investment on their own. They should use route of mutual fund for investment into equity shares. The reasons given are more than one like mutual funds brings benefit of diversification; they are professional managers and understand market dynamics better etc. So why risk your money by putting into stocks directly? However, this is easier said than done. How will an investor indentify which are the best schemes available for him as there are hundreds of schemes of mutual fund available in the market.
Let us come to some soul searching exercise. How many investors understand complex world of mutual fund? Are they familiar with concepts of, 'Expense Ratio', 'R Squared' or, 'Sharpe Ratio' to name a few. Do they understand how a mutual fund churns its portfolio and will it be in interest of investors? Mutual funds do not disclose, the composition of portfolio on daily basis, nor are they expected to do. So how will an investor know whether his money is parked in most valuable equity shares? Don't all these limitations create problem for retail investors, reduce benefits of investments into mutual funds to some extent. What investors generally look at is the star rating of a mutual fund scheme, advice from some experts and browsing websites before investing into mutual funds. Does this mean that due diligence has been done by the investor? Is it a fool proof strategy?
Let us imagine for a movement that a retail investor understands the complex world of mutual fund. If an investor knows all the concepts mentioned above, isn't as an investor he is equally capable of investing in equity shares? However, the complexity of investment into mutual funds does not end here. Even after investing in a mutual fund, a retail investor has to continuously monitor the performance of the mutual fund. So funds like , 'Reliance Vision Fund' and 'Reliance Growth Fund' which used to be one of the most preferred schemes for investment in pre 2008 phase are currently laggards and have failed to generate returns which match funds like ,'IDFC Premier Equity' or 'UTI opportunities Fund'. So the job of an investor into mutual fund does not end with selection of a fund and investment into it. He has to continuously evaluate the performance of mutual fund as well. Otherwise, his hard earned money may sink and he may not get the return he was aspiring for.
If so much of effort needs to be put to evaluate a mutual fund, why not try stocks as well. If you do not understand the complex world of equities, it is absolutely no issue. Look at some basics in a stock of a company like:
- For many years a company is running its business
- Is it making continuous profit?
- Is the management of the company good and has got a clean record
- In which products does the company deal and how has been the market demand for such products
The list obviously is very exhaustive and needs detailed understanding. However, why not create a portfolio of some stocks and see how it performs. The cost will obviously be low compared to mutual fund. Stocks such as ,'ITC','HDFC',' HDFC Bank', 'CRISIL' etc. have created value for investors consistently and have even surprised the experts and analysts from time to time. In fact, you need not to be an expert to buy a stock like ITC. Common sense approach will drive an investor to pick a stock like ITC. Needless to say that just as mutual funds investment are subject to market risks, so are investments into stock. Why not try investment into some of the stocks which have been value creator for since a long time.