Friday, 6 July 2018

Mutual Funds V Stock Trading - Why Investing In Stocks Directly Is More Beneficial


It is now common knowledge that the ROI on equities is far superior than any asset class. But the question which troubles people is to whether to invest in stocks directly or invest in mutual funds. Truth is there is a clear winner when it comes to picking the winner among the two. But thanks to the clout which the mutual fund industry fold over the mainstream media. Mutual fund houses spend huge monies on advertising on newspapers, TV & digital. This gives them the clout to influence news articles based on the mutual fund industry.

We list out the benefits of mutual funds vis-a'-vis stocks

Mutual Funds

Mutual Funds are generally categorized  based on the type of equities they invest it(click here to read more about type of equities). Every mutual fund is managed by a fund manager. Based on your risk appetite & the fund manager's prior performance, you can choose the fund which best suits your needs.

Pros:

1) Knowledge: Investing in mutual funds doesn't require you to have a thorough knowledge of stock markets. You just need to opt for the type of fund you are interested in ie a large cap fund or mid cap or ELSS etc. The fund manager will then utilize your money to invest in stocks which he deems fit.

2) Comfort: A mutual fund investor is not required to keep a close eye on stock markets. Investing in stocks directly requires you to track movements daily. While a mutual fund investor can manage by just looking at his/her NAV once in a month.

3) Brokerage: While trading in stocks will lead to brokerage charges, mutual fund investments require you to shell out no additional monies as brokerage. The money you invest in a mutual fund covers brokerage charges as well.

4) Tax Saving: Investing in ELSS mutual funds can help you in saving tax. ELSS mutual funds give better returns than other tax saving instruments. While investing in stocks directly results in no tax benefits whatsoever.

Now let us compare these benefits of investing in mutual funds to investing in stocks directly (what mainstream media & mutual fund houses will never tell you)

1) ROI: While it is true that investing in stocks directly requires you to have good knowledge of equities, the huge ROI more than makes up for it. Just a few minutes of research on finance portals like moneycontrol.com or economictimes.com or thehindubusinessline.com & voila! you will develop a gut instinct for picking equities on your own.

While the ROI for stocks we invested in directly was at 20% (beating the BSE), the ROI from mutual funds was 12%. This year the ROI on stocks has been 4%, while ROI on mutual funds is 1%. Most of the mutual funds we invested in this year are showing negative returns.

Mutual Fund houses will want you to believe that only their fund managers can beat the market. Nothing can be further from the truth. I myself am from a sales background with no training in stocks or finance. Despite no formal training we have been able to beat the market for 8 out of years & mutual fund returns for all these 10 years!

2) Dividend: Mutual funds do offer a dividend option, wherein a sum will be paid to you regularly. But this pales in comparison to the dividend income earned by investing in stocks directly. Mutual funds do not pass on the money earned through dividends & instead give you a lumpsum amount on you redeeming your units.

3) Bonus Shares: Every couple of years profitable companies announce bonus shares ie a bonus of 1:1, will result in you getting a bonus share for every single share you own. A bonus of 2:1, will earn you 1 bonus share for every two shares that you own of that stock.

In our 10 years of investing in stocks, we have been happy recipients of atleast 15 bonus shares payouts.

Your mutual fund on the other hand again will not be passing on these benefits.

 It is a myth that mutual fund investors can afford to "invest in it & forget it". Mutual fund investments require you to monitor them monthly. The longer you stay invested with a mutual fund, the more they benefit. That explains why they ask you to invested for 7 years!

If the returns are not in the excess of 10% per annum after 3-4 years, please sell your mutual fund ASAP.

The fund manager are literally celebrities of the finance world. Most of them boast of an ivy league education. People invest their monies just based on the reputation of the fund manager. Let us not forget that the salaries of fund managers runs into several crores. It does not require a genius to figure out from how the fund house manages to pay the fund managers. it is obviously from the money you have paid! A good chunk from the money earned from stocks will be given to the fund manager.

Which makes us ask you - "Why give your money to fund the fund manager's salary instead of pocketing all the profits yourself?"

Many sceptics are of the opinion that fund managers are better equipped to deal with your investments in times of crises. In our decade long experience of investing in stocks, we are yet to see a fund manager or any known living being being able to predict the market. Even the great Warren Buffett has gone wrong with his bets. Truth is nobody can predict or time the market(click here to read about equity investing strategies).

Follow these tips for maximum ROI from your stock investments

1) Buy stocks like you buy grocery: Equity investing experts will agree in unison that one should invest all their monies on a single stock. Buy stocks like you buy grocery ie buy a bit of every category. Buy stocks across categories & sizes. Our portfolio consists of stocks from FMCG, IT, Pharma, BFSI, Real Estate, Auto etc. While 40% of our portfolio consists of large cap stocks, 50% of our portflio is made up of mid-cap stocks. the remaining 10% is made of small cap stocks. One can choose to change this allocation as per their risk appetite.

2) Monitor You Investments: Investing in stocks directly, requires you to monitor your investments & research the markets on a daily basis. Sell any stocks which is making a loss of more than 30%. Investors who do not keep a stop loss pay for it dearly.

3) Time: As per experts, the minimum time horizon for stocks to give you handsome returns is 3 years. If you stay invested for 7 years, it is highly unlikely that you won't make handsome gains. If you cannot let go of the money for 3 years, it is better if you invest the money in a debt fund instead.

 Warren Buffet says that compounding is the eight wonder of the world. Mutual fund investor's short sightedness makes them overlook the huge gains that one can accrue from investing a little time daily in researching stocks & investing in them directly.

The difference between growth rates of stocks & mutual fund investments is 5%-10% per year(in favor of stocks). This will lead to the returns of the stocks investor to be almost triple of the returns of a mutual fund investor! Are you ready to part with so much money just to make the already rich mutual fund manager richer?

No comments:

Post a Comment