An affordable and convenient investment option for investors

Mutual funds offer an affordable and convenient way to invest in a diversified portfolio.

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The English translation of the article is as follows:

Among the many benefits of mutual funds, we often hear about affordability. The argument in favour of affordability is that a small investor can start investing even small amounts of money. This was a big advantage when we had physical share certificates and one could not put small amounts of money into buying a “market lot” of shares. A market lot in shares was a certain minimum number of shares that an investor had to buy in order to trade in the normal markets. These lots, in most cases, consisted of 100 shares. Anything other than this market lot was known as “odd lot” and the same traded at a discount to the market lot, generally. At the same time, investing money in fixed income instruments was much easier with banks accepting small amounts of deposits and the Government promoted small savings schemes.

However, in the mid-1990s, the investment world changed with the advent of information technology and with that technology enabled solutions like electronic trading and dematerialization of securities. This allowed investors to buy even one share of a company rather than buying a market lot. Thus, investing became affordable, if one were to consider a single stock.

It is ok to keep buying single stocks if one has only limited resources. This could be a good accumulation strategy. However, this suffers from three drawbacks or limitations.

First, one may not be able to properly diversify the portfolio. Buying one share every time one has money will take a long to build a portfolio that is properly diversified. This process of building a portfolio will require a lot of planning to arrive at a proper diversification and the steps to buy the identified stocks. On top of that, one would also be required to know which stocks to buy or avoid.

Second, it requires immense amount of discipline to follow this strategy in order to accumulate a sufficiently diversified portfolio. If you need to buy 30 stocks to diversify your portfolio, it will take roughly 30 months (assuming you get a monthly salary and hence monthly savings) to do those 30 transactions. If the market prices go up and down during this period, it becomes very difficult for most to stay focused on the plan to continue buying.

Third, the weightage of each stock in the portfolio would not be a function of what one wants, but that would depend on the price of each share. While the savings over the period may be constant, the prices of different shares may not be the same. So, if you save Rs. 1,000 monthly, you can buy a share that is priced at Rs. 900. However, what do you do if the share you want to buy is priced at Rs. 3,000?

Considering that it is inconvenient to pursue such an investment strategy, which takes away precious time away from your family life and your hobbies, we must try to find a solution that is easier, convenient, effective and consumes less time.

This is where mutual funds enter. You can buy a portfolio consisting of 30 or 50 well-researched stocks (regular monitoring of the portfolio, included in the deal) for as little as Rs. 1,000 per month. Now, the only thing you need is to continue your SIP (Systematic Investment Plan).

So, go ahead and enjoy life. Leave the task of money management to a mutual fund company.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.

Disclaimer: This article should not be construed as investment advice.