Read my article on whether it makes sense to invest directly in stocks or through equity mutual funds
http://epaper.gujaratimidday.com//epaperpdf/gmd/06072015/06072015-md-gm-12.pdf
The English translation is as under:
http://epaper.gujaratimidday.com//epaperpdf/gmd/06072015/06072015-md-gm-12.pdf
The English translation is as under:
“Should I invest in stocks directly or through equity mutual funds?
Which of the two can generate better returns?” A participant asked in one of my
investment seminars. This is not the first time that one has faced this
question. This question keeps cropping up periodically.
There are quite a few investors who think they can easily generate
higher returns than most mutual fund managers. Many also quote some of their
successful stock picks. Such examples could be quite attractive, and seductive
sometimes. The result being, some individuals start thinking that beating other
investors is quite easy. When one sees someone making money (or hears about
such a story), the above question is raised.
What should one do? The question is straight forward, and so is the
answer.
One has to go back and understand what a mutual fund really is. A
mutual fund is an investment vehicle offered by an asset management company. An
investor investing in a mutual fund is outsourcing the activities related to
investment management to a professional fund management and administration
team. This professional fund management team takes up certain tasks on behalf
of the investor, e.g. analyzing and identifying for investment opportunities, managing
the inflows and outflows in the fund, taking care of investment administrative
activities, valuation of the portfolio and calculation of the NAV, etc.
If an investor has to do all these activities, one would need three
things, viz. (1) skills and abilities to manage money, (2) time required for
various activities including investment research and administration, and (3)
liking for all these activities. In the absence of one out of the first two,
the performance could turn out to be disastrous.
Investment management is a full time job and requires one to devote
time towards study of balance sheets of companies to understand the businesses
one is buying. It is surprising that so many investors buy stocks of companies
without knowing the business of a company. Let us understand that one becomes
part owner of a company by buying stocks. The owner of a company is entitled to
profits of the company in proportion of the shareholding. If one is looking at
becoming shareholder of a company with this understanding, it is important to
buy stocks of companies that can remain profitable for long. In order to
understand whether a company would be profitable or not for long, there is only
one way – study the business of the company.
During one such discussion, one gentleman looking for buying stocks
asked, “How many people know how to read a balance sheet of a company?” His
question is right. However, there is a bigger danger if one really understands
what is happening. Anyone looking for buying stocks should read the balance
sheet. However, if one does not know how to read one, is trying to invest one’s
hard-earned money without realizing where the money is going. Isn’t that a
bigger danger?
Well, in the absence of abilities one would be better off taking
professional help. This is where mutual funds come on.
Very often, we tend to look at things, which are less important and
ignore things that matter the most. In the question of managing money, whether
direct investment in stocks would be more rewarding than investing through
mutual funds, one often misses out the amount of time and effort one has to put
in. there could be better utilization of one’s own time – spending time with
the family, pursuing some hobbies, etc.
Enjoy life!
Amit
Trivedi
The
author runs Karmayog Knowledge Academy. The views expressed are his personal
opinions.
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