Direct stocks or mutual funds?

The dice is heavily loaded in favour of mutual funds, unless you are a great stock picker.

At a time when both Indian and global equity markets are being plagued by bad news, retail investors aren’t sure of the strategy they need to adopt. Should they bet on the equity markets now or take the safe route of mutual funds?

This is a loaded question. This does not have a simple yes or no answer and depends on a person's risk taking ability, return expectations combined with the ability and inclination to manage a share portfolio, as opposed to simply investing in mutual fund schemes.

However, if the same question is posed in the context of the current downward slide in the markets, the answer could be far more definite.

Consider this… can a person used to swimming in a pool switch to swimming in an ocean or river at will? The answer seems self-evident as swimming in a pool is far easier as it is a controlled environment. Swimming in a river or ocean is far more difficult as one has to contend with the surging waters, currents and whirlpools.

There are of course other lurking dangers like alligators, sharks and so on, which can cause harm. So, even those who swim regularly in pools aren’t always willing to jump into a river or ocean. Apart from the perils involved, swimming in the open, also calls for higher level of skills. It even involves different, special skills, not required in a pool.

MUTUAL FUNDS 

That is precisely the difference between investing in mutual funds and equity. Mutual fund investments are far safer as there is a fund manager who takes care of the investments and whose only mandate is to monitor and manage the investments that his fund makes. Not much knowledge is required from the investors' side, except for the due diligence on selecting an appropriate fund to invest, in-line with their requirements.

Most investors, are not even aware of who the fund manger is, but a look at the kind of returns the fund manages over the years, and you can judge his work. Good managers will use extensive information from their research to pick the best stocks. Over time, the investor just needs to check if the fund manager is sticking to the mandate and is delivering a return superior to the corresponding index and the category, enough to justify the charges.

But not all investors want to depend on the fund manager’s discretion. Such an investor may want to invest in the broad economy instead. He could invest in index funds. This is even simpler, as the investor does not have to spend too much time studying what to invest in. All he needs to know is which index, he should like to invest in and what the charges are for managing it.

Savvy investors may also want to go through websites that rate mutual funds on various parameters.

EQUITY 

Equity, however, is a different ball game. Here, the investor needs to analyse and choose the equity shares to invest in. This is easier said than done. Choosing a good equity share requires broad understanding of the economy, sectors and the company itself. One has to go through the financials of the company like balance sheet, profit and loss account as well as all other parameters that indicate the health of the enterprise.

As individual investors, most people do not have the capability nor the inclination to do this. Unless, they have a good broker or advisor, they may end up taking or simply choose bluechips. you could end up a sucker , if you have been taking tips from the wrong person.

Again the latter may also not be the best investment decision since there are many good buys even among the smaller stocks. By avoiding them totally, you may miss the opportunity to buy potential multibaggers. You might as well have, invested in an index funds if you want to go for bluechips only.

STRATEGY 

Given these facts, investors want to know what changes they need to introduce in their strategy. The proximate cause is that an investor hears that some stock's prices have come to 50 per cent levels of what it was prevailing at, a year ago. Investors will also find bluechips among these. Most market experts have been asking investors to buy at such points, given that these stocks may not be available at such attractive valuations in a upward moving market. That gets investors salivating.

But if there are major drops, there would be reasons for it. Assuming that it has dropped due to market conditions would be wrong. GTL Infra and KS Oils are cases in the point. For KS Oils the 52 week High/low is 63.1 and 7.7 and that for GTL Infra is 48/ 10.5. The drops here may make one salivate and invest in them; but these companies prices have come down because the equity shares pledged have been sold to recover the money.

That hints at a cashflow problem for these companies and hence caution is advised. What this illustrates is that, just a price drop is not sufficient reason for picking up a stock. Unfortunately, in a falling market, investors who follow the herd mentality, may end up picking up stocks that should be best left untouched.

Investments are done with a purpose. Admittedly, there is more than one route to get to one's goal. Mutual funds allow investments through either lump sum payments or systematic investment plans. One could follow similar investment patterns for equity investing too. Either ways, staying invested for longer periods is the only way to make money from equities as well as mutual funds.

However, changing from equity to mutual funds or vice versa, may not be warranted just to take advantage of a falling market. Those investing in mutual funds should continue to stay invested there - for the fund manager would be able to take advantage of the situation, much better than any individual investor.

Those who have been investing in equities, however will have enough knowledge to pick and choose the right investments. For them, equity markets at this point provides great opportunities. Equity investors can consider mutual funds, to bring down their risk.In summary, one need not change the investment strategy due to market conditions. Rather, it is better to think it out before opting for a strategy. And once done, stick to one's strategy - be it equity or mutual fund investing.

Source: http://www.business-standard.com/india/news/direct-stocks-or-mutual-funds/447968/