POSTED BY March 29, 2012 COMMENTS (98)ON
When we say Equity, what comes to your mind – Stock or Equity Mutual Fund? While a single stock or a mutual fund both comes under the category of Equity and they are good option for long-term investment and needs periodic review. There are some differences between stock investing and mutual fund investing that is done by a common man. It’s a good idea to know where they differ and in which situation they differ, so that one can take better investing decisions. Let’s look at the main differences
When you invest in a single stock or bunch of stocks (3-5 scrips), the change in it’s value is very high. On a given day it can be extremely volatile. It can give you 20% return and sometimes -10% loss also depending on the environment. This can be very exciting and at the same time very disheartening and gives you a feeling that you need to “act fast”.
Mutual fund on the other hand is not that much volatile by nature, as the diversification is very large and at a time 50-100 stocks are covered. Different kinds of stocks from different sectors and market capitalization are involved in mutual fund and the over all change in value is thus less volatile (other than extreme days).
This is very much in line with the above point but still let’s look at it separately. There are lot of success stories where someone got quick rich by investing in equities directly and it can happen, but those are rare happenings and require lot of work and analysis, patience and belief in what you have picked. If you want superb returns in short time and you believe you can research well, you can go for stock investing directly but then risk is also more.
Mutual funds are known to deliver good returns (not in line with stocks, but still very good). So you can expect handsome returns from mutual funds but not unbelievable like stocks return. This is mainly because the money is diversified across different stocks (read ideas) and chances of all of them becoming a super success in short time is impossible.
Stock investing is a personal affair and you are doing it on your own the decision of what to sell and what to buy is on you. Even in case of long-term investing, you might have to keep an eye every quarter or yearly unless you have really spent some good time in picking the good stock. You need to also keep an eye on news and sector specific developments.
Monitoring in mutual funds is relatively low because the job of monitoring is anyways done by the fund manager who is paid SALARY to filter through the fluctuations. He constantly adds and removes the stocks from the portfolio. This can be a positive point, but sometimes it can be a negative point also if there is too much of churning.
Mutual funds are known for possibility of SIP (monthly investment). SIP in mutual fund works and is recommended as a great way for a salaried person to invest in equity markets for long-term basis without understanding the working of equity markets.
However SIP in stocks do not work. Yes, some companies provide you the facility of SIP in stocks, but it’s a terrible concept. There is no diversification and SIP in a particular stock does not make sense because the risk is with single stock. A stock can be in a bad phase for years and decades, whereas in a mutual fund the bad performing stock is weeded out.
Stocks investing is restricted to Stocks only. You can choose a large cap stock, mid cap stock or small cap stock, but finally it will be equity asset class. However, mutual funds can invest in mix of asset classes. There are equity funds, debt funds, gold funds, Mix of Equity and debt also. To top up, even balanced funds are there which can adjust the asset allocation on its own, so in a way mutual funds are more superior in terms of features compared to a single or bunch or stocks.
Mutual Funds are actually collection of stocks only but just because it’s a group of stocks the characteristics are not very similar to that of stocks. You should be clear about all the points of difference and only after that you should decide whether to invest in Stocks directly or take the Mutual Fund route.
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98 replies on this article “5 difference between stock & mutual funds Investing”
Thank you for the Amazing article. It is really beneficial.
I just heared about a new bond: “HUDCO Ltd tax free secured redeemable non convertible bonds”, is it really safe to invest in???? Could u plz give me any idea?
PLease start a thread on our forum to ask about it, you can create your account here – https://www.jagoinvestor.com/wp-login.php?action=register and ask your questions here – https://www.jagoinvestor.com/ask
Hi manish…i want to invest my money, but very confused where to invest; stocks or mutual funds ? I am a salaried person with around 30k/month. So can u guide me which is safest place to invest; as a short term investment ?
Here is how you should start – https://www.jagoinvestor.com/2012/11/investing-for-newcomer.html
If you are new, then you should go for mutual fund but if can analyse stocks then go for investment in stock market for long term in blue chip company, you will get handsome gain.
Have you experienced the same thing
I am a regular reader of your articles (Jagoivestor). As your web name is JAGOINVESOR, its really doing a great job in creating awareness among the common investors. Two months back I have stared investing in MF and Debts funds with the help of a certified FP. Being very new and not knowing ABC of Mf, I find your forum/articles very useful, informative, lucid and much relevant to our curiosity of knowing more on Mfs. I have been reading your forum/ articles for last 6-7 months and in spite of the fact that i am not a good communicator I cannot resist my temptation to acknowledge my feelings. Its really great and wonderful and please do keep writing towards making us (INDIANS) a SMART INVESTOR
You are a good communicator and your have conveyed your feelings very well here 🙂 . Please keep on commenting and be in conversation !
For long term you can invest in Equity in following stocks for minimum 5years time frame. You will get handsome gain.
1. Tata Motors
9. JSW Steel
sir, i am thinking to invest some amount monthly by SIP in SBI gold fund for my child education who is now 3 years old. please tell me whether i am taking correct decision? or suggest me the best option.
For long term … gold is not the best investment vehicle ! . better invest in mutual funds (pure equity)
For long term you can invest in Equity in following stocks for minimum 5years time frame. You will get handsome gain.
1. Tata Motors
9. JSW Steel
Thanks for the list . what is the basis of choosing these stocks !
If you are new, then you should go for mutual fund but if can analyse stocks then go for investment in stock market for long term in blue chip company, you will get handsome gain.
This is a general query:
Suppose i want to build say 50 Lakh in next 10 years by MF SIP by selecting say MF-A,MF-B, MF-C and i have invested for 5 years, in case after 5 years MF-A starts performing badly like Reliance Growth now and assume i have already invested around 8 Lakh in this fund, so i am forced to sell this fund in this case what should i do? how do i reinvest this amount? do i have to do SIP again with some other fund with 8 lakh amount? which will eventually affect my planned amount 50 Lakh as doing SIP again takes time also to get returns from new fund for remaining 5 years SIP reinvestment is difficult, Can you please let us know what is the strategy to follow in this case of scenorio?
Performance of Mutual Funds depends on the fund management primarily. If IDFC Premier is doing too well, it is because of Ken Andrade. If HDFC funds are doing well, it is because of Prashant Jain.
Looking at Reliance growth, it went downhill because of Madhu Kela moving out of the fund management quite a while back. (http://forbesindia.com/article/boardroom/why-madhu-kela-moved-out-of-reliance-mf/22172/1) My suggestion to you is to transition out of Reliance growth. There were definitely warning signs for that fund for some time (Value Research ratings went down from 5 to 3 gradually).
There are multiple strategies how you can move the funds either in bulk (sell high and buy low) or gradually using SWPs and SIPs. Your risk tolerance and mileage may vary.
Very good compilation. I have been in investing in both stocks & MF for the quite sometime and have benefited from it. I feel many new investors fall trap to stocks with the lure of making quick money, instead they should start via SIP in MF and then do extensive research and invest in stocks.
The statistics say that only 10% of people make money in stocks.
I think 10% is too high ! . it should not be more than 5% !
I enjoy trading in a smaller capacity and do it regularly though I have very bad experience in stock trading.
Glad to know that Suman Gayen ..
Take away the zero Rakesh 🙂
@Ravi you are correct, but still those investors can’t avoid inflation risk. As Manish asked 1 yr & 10 yrs risk is same? He wanted to mean that if the time horizon is 10 years the risk is very less. In modern portfolio theory the slogan is maximum return with minimum risk. We always consider the time horizon and the investor’s investment in different asset classes so far etc. Mutual fund is managed fund but stock is not. To beat inflation one has to invest a portion in equity depending on his/her risk appetite & time horizon. If you save one rupee, you save it for tomorrow and today’s money is valuable than tomorrow’s money, so let your money work for tomorrow!
those who dont want to take risk should invest in PPF/FDs. as MF and Stocks both have risk and it is very risky to decide which one has less risk because risk is risk.
You mean 1 yr investment risk in mutual funds is same as 10 yrs of investment risk ?
People who invest little bit money every month, they have only one best option — Mutual Funds. Otherwise, go for Direct Stocks.
Yes . i also think so .. SIP in mutual funds is best way to create wealth for those who have monthly cashflows !
Investing in sghares or Equity Mutual fund, carries a level of risk, where it may vary marginaly between them . Better option identify a script and go for a sip in the script.
SIP in a stocks is not recommended !
Why don’t you recommend SIP in Stocks? Is there any particular reason?
Read this : http://www.subramoney.com/2010/12/sip-works-only-in-a-portfolio/
“With a single scrip you can average, but requires tremendous amount of information, and skill.”
Yes, I don’t have that much knowledge and skills. So i also agree with Mutual Funds.
Yes .. it will take much much more effort in single scrip to average and do SIP , which is really not in control of a common investor . So better do it in SIP !
As the article says, the equivalent of SIP in Stocks is called “cost averaging”. Works very well in a market downtrend when there is too much pessimism. But there is always risk in making an investment unless you are very clear about the future in that investment. If you have a position in a stock like ITC and it goes down by 15-20%, it makes a lot of sense in cost averaging. But not in a broker managed scheme like an Equity SIP.
Please don’t try this mechanism unless you are very clear that it is a safe additional investment. Don’t blame me for the advice. 🙂
Hi, Is money earned by Mutual Funds Managers from Investments distributed completely to Customers?
Hi Vijay .. yes , but after deducting expense ratio ! , which is very valid .
See what happened to the Reliance Industries? Reliance lead the market in 2003-07 period. It touched 1600 on Jan, 2008 and now it is at 724. It was a fancy stock in that period, but not now. So buy at low and sell at high is always better strategy for every one. It’s not our wife to keep with us for the long time period. It will apply for the stocks as well as Funds.
by saying this your asking to time the market.Like i said before its easy to say you should have sold reliance in 2007. But how many people who invsted in it in 2002 without any research would have done that? a cagr at par with 30% for 7 years why would they sell it..they bought it on someone advise and they would have waited for someone to say SELL. And no broker on news or any form talked about SELL in 2007 did they?
That is why its tough for individual to do direct investing without investing enough time on research and constant check
I agree with you. But Reliance touched 1600/- on jan, 2008 (all time high) did not touch that level till now and everyone knows it’s not a growth stock. I don’t understand why mutual funds still have this stock in their portfolio.
If you really looking to invest in Mutual funds for the long time, then why don’t you prefer direct stocks? Can any one say that Power Grid and L& T Finance will not touch 400 and 200 respectively after 10 years? Right now they are available at below MRP rates. Coal India is the 2nd largest Coal company in the world. Our cement companies are the largest in the world. Our banking system is very strong than many largest financial organizations like CITI Group, JP Morgan..etc. There are so many good companies in our country. We can easily find out them in bear markets.
If you don’t have time, then go for Diversified Mutual funds. But if you don’t have time and you want to learn about stock market, then go for Nifty Bees and Junior Bees.
Another good one manish.
From the comment section it feels like people are comfortable with direct stocks.
There are lot many risks involved in direct stocks.Yes the return is conservative 12-15% in mutual fund. But if you have diversified direct stock portfolio of 10-15 stock how many of them will surpass this conservative estimate. You should be too good to get anything like 15-30% CAGR with your stock list.
People can always come and say if one had purchased just HDFC,Infosys and ITC from Nifty they would have made 25% CAGR for past 15 years. But how many would have been ready to take such concentrated risk?.
I am not vouching for MF but for a full time employeed person with little time to do research and keep constant check,he is better of with investment in MF.
Disclaimer:I have 50% in direct and 50% in MF
Infosys touched around 2800 in Jan 2008 and dropped close to 1050 by Jan 2009. How many have the temperament to hold the stock when it falls that much.
Post that Infy has touched 3400 in Nov 2010 and trading at 2800 now.
Definately .. thats the point of investing in mutual funds .. thanks for your views !
I have a doubt on Mutual Funds.
For example, Lets take one best Mutual Fund, Say “Franklin India Blue chip Fund (G) “, This has given 48% CAGR returns from May, 2003 to Jan 2nd, 2008. But from May, 2003 to Nov 10th, 2010, CAGR is 25%. Everyone thinks if market falls, then we can get more units and more returns. But this works in reverse for Mutual Funds. But if you directly invest in stocks from May 2003, You will be getting huge returns than Mutual Funds. If there is atleast one company like Satyam in our Mutual Fund, Then we get negative returns and we can’t ask the fund house to remove that company from the fund portfolio.
Lets take 2 Mutual Funds A and B.
A fund has given 30%, 32%, 30%, 32%, 35%, 30%, -10%, -15% (2004-2011) returns in last 8 years and B has given 20%, 26%, 20%, 25%, 36%, 32%, -3%, -2% (2004-2011) returns for the same period. Now tell me which is the Top rated mutual fund ? A or B?
And if we calculate the returns upto 6 years, then A will be the top rated Fund. If you calculate returns upto 8 years, then you can find out the secret of Mutual Funds.
Are you referring to SIP returns or fund return and this may vary. Also the units bought during down turn of 2008 is yet to pick up.The last 5 year nifty return is in range of 5-7%.
SIP works and it works best in mutual Fund and works the worst in case of Equity SIP
I am referring SIP returns. For “Franklin India Bluechip Fund (G)”, From May, 2003 to Jan, 2008; we got 840 units if we invested 1000/- every month. Total Amount Invested is 56,000/- and Investment Value as on Jan 05, 2008 is 1,65,282/-. CAGR is 48%.
But From Myy, 2003 to Nov, 2010; we got 1074 units if we invested 1000/- every month. Total Amount Invested is 91,000/- and Investment Value as on Nov 05, 2010 is 2,48,340./-. CAGR is 26%. On Nov, 2010; Markets touched the all time high 6320 after jan, 2008.
I am not against Mutual Funds. But how can we identify the best Mutual funds out of 216 Funds? Every year ranks will be changed by their performance and we don’t know the performance of present top rated funds in 2003. If i am wrong, correct me.
You may not want to go by the ranking of the funds. For some indication of how a fund is doing, just look at the Value Research rating (www.valueresearchonline.com) or browse the ET Wealth (published on Mondays) rating tables. A 4 or a 5 rating in the respective category Diversified equity, Balanced) is decent. If thr rating goes up or down any week/month, just look at possible reasons. Compare the returns of the fund with other top rated funds for some insights.
If the fund doesn’t match your expectation in terms of performance (or met your goals) etc. throw away any emotional association and sell the fund.
Yes .. any mutual funds is always good in a particular time frame , if a fund is good in 5 yrs time frame, it can be bad in 8 yrs time frame .. you can find out the CARG return of 2 funds , and one of them will be above other, but that does not mean its the best one ! .. you also have to look at the variation in providing good return !
I have never invested in stocks as my father never allowed me. There is no great book on Stock Market in this World. But if we have, then that book will be the best seller in the world and the author will win Nobel Prize.
Many people say there is a book “The intelligent Investor”. But the book say only one thing “Margin of Safety” and ” Incremental Value” or “Fair Value”.
Current Nifty P/B Ratio is at 2.94. Only 4 times in the History, Nifty P/B ratio is below 3. So this is the right time to enter the market (If you miss the bus in Dec, 2011).
Now a days, It’s very easy to identify the best stocks. We don’t need to analyses stocks because everything is displayed on websites like Moneycontrol.
Today inflation is very High. So go for Interest Rates related sectors like Banks, Two wheelers and Auto Sectors. I avoid Infra Sector, but like to buy the IVRCL. Because it seems to be the strong company in this bull market. I feel RBI will lower the interest rates after 3 to 4 months. So we can directly invest in these sector stocks.
Open this link. “http://www.investinternals.com/2008/07/what-are-reasons-behind-huge-stock.html”. It may help you.
From the above post, You can understand that Inflation, In stable political conditions, Fuel price hike, US economy slowdown and Large selling activity by FII’s can influence the Market. Now what about the current Indian Economy Situation? Inflation and Crude is still high. So in the short term, Market will fall. But in the long term, You can get huge returns if you invest money every month in stocks (Specified Sectors only)like SIP.
Come to the Mutual Funds, People like Warren Buffet and Peter Lynch never recommend us to invest in Mutual Funds. This concept is developed by Brokerage Institutes for their Commissions (This is my personal opinion only).
Peter Lynch himself managed Magellan funds for 12 years or so that propelled him to fame.
What Warren Buffett does as part of Berkeshire Hathaway is not called a Mutual fund by anyone – but is indeed a holding company for a number of companies that they buy [with control].
I would still rate “The Intelligent Investor” as the best book ever on investing because it is practical and it details asset allocation, the pitfalls of chasing unexisting returns and almost the breadth and depth of the market except for derivatives [He handled Warrants though].
To each his own:
– Stocks : High risk High return
– MF: Relatively low risk; Relatively lower return.
Both usually beat the market [India growth story will ensure MF returns continues for a long time].
Both beat Inflation.
Individuals can choose which way to achieve financial goals!
While I agree that new investors should go via mutual fund, they should also know the drawbacks of mutual funds. Some are listed here:
1 – They charge good amount of money. About 2.5% of total value of your asset is charged every year by majority of mutual funds. So, if ‘market’ is growing at 12.5% every year, then your fund may grow by only 10%. It makes a huge difference over 15-20 years.
2 – Due to their size, they cannot afford to buy not so liquid stocks. hence they invest primarily in liquid stocks, which you can also do.
3 – The fund name and the investment they do can be totally different. If you do not watch the fund closely, sometimes you get raw deal here. This hurts people if they invest in specific MFs looking at their names like Enrgy fund / Infra fund etc. But Fund Manager may buy anything that he choses to.
4 – There are cases where they try to make personal profit when they buy or sell stocks in their fund. 4-5 months back i heard HDFC penalising few fund managers for doing this ‘front loading’. I am sure many fund managers do it. Subra (subramoney.com) had mentioned in one of his blogs that fund manager’s office is crowded with brokers who want to see what they might do and profit from this advanced knowledge.
Finally, I wouldn’t trust giving my money to someone (Fund Manager), or for that matter anyone. If you can analyze annual report reasonably well, then I suggest you invest directly in stocks and have a diversified portfolio.
If you find it difficult, then I suggest you invest in Index mutual funds (Benechmark Nifty, benchmark Bankex etc). They atleast charge less (0.5%) and also do not speculate.
A handful of Mutual funds (including Balanced funds) have beat the index by a large margin over a decade or even more. Such long term performance does not happen by chance.
It is very easy for someone to say a direct stock portfolio can beat the market. But only infinitesimal number of people have the temperament for digesting the wild swings in an individual portfolio. I personally favour direct investing as well but such a strategy is not suitable for a bulk of the population – this I think we can agree.
You are absolutely correct when you say that very few MF or stock portfoilo’s beat the market in long term. I have also seen that in some cases where they have beaten the market, it is by luck also.
Now the question is: why should we beat the market? (There is nothing wrong with the market. So why “beat” it 🙂 ). A low net worth person, might look at getting very high returns (more like lottery) so that he can jump to slightly better position. But an HNI might be intersted in protecting his assets with reasonable returns (probably slihglty higher than FD). You can see this when you notice that most of these tax free bonds are oversubscribed by HNIs 4-5 times. So, everyone’s goal is different and they don’t have to compare with market returns. In my case, I don’t care about beating the market as long as I do better than my neighbour !!
sorry for changing topic from MF discussion. I thought I will pen down my views on this as well.
While I do respect your perspective and opinions, I would like to provide my perspective on this as well.
On Point 1 (2.5% charges): That is the cost of doing business for a service that is provided. Aren’t we compensated for the work that we do or the service that we provide? Whether there is transparency is terms of the charges is something that merits a totally different discussion.
Point 2: Funds that invest in illiquid stocks are mostly hedge funds or speculative funds. If the fund manager is smart, he will find innovative ways to do an off-market transaction. In any case, most respected funds don’t keep a high % of illiquid stocks. That is a recipe for disaster. If very few people want those stocks, why bother with them?
Point 3: Fund managers have to strictly adhere to the norms of capitalization, % of stocks/debt that they can own etc. Most funds make it a point to publish their data with a 1 month delay and you can very well view it in many sites. The reputation of a fund depends on the reputation of a fund manager. I would go with any fund managed by Kenneth Andrade or Prashant Jain because they have an excellent standing in managing within the boundaries they are allowed to.
Point 4: HDFC is one of the most respected institutions. There are always bad apples in every organization. Punishing the managers is a good thing. I haven’t seen any other fund house come out in the open and say about any bad things that happened within their organizations.
Most of the investors don’t have the time to learn about the market and the intricacies associated with the market. Mutual Funds are the best route for them since they don’t have to (they can’t!) monitor them on a minute-by-minute basis or have the risk appetite to deal with lots of scenarios. There is very little information that is shared to the investors by the respective companies and fund managers are the best bet to have access to this information.
This is a Capitilist Economies Gimmick to make quick Money & they have encouraged it ; the Govts & big section of the populatiuon find it convenient to raise Funds; the directors of Big Companies make hay (Fat Packets / Perks /Pay )while the Sun shines due to hard earned Money of Investors & leave them in Lurch when the stock falls; For Ambanis & the Like a few 100 Crores up & down is equal to a few 100 Paisa, but Heavens will fall for small investor and may lead to a suicide.
SATTEBZI was considered bad in olden time and all were asked to shun it, but it has been legitimized by the Govt by permitting BSE / Nifty etc. and a new crop of Financial Advisers / Institutions have come up & making a living out of it ; sad
Having said that, if u can keep a track of not day to day basis but minute to minute Basis go ahead with Stocks’ otherwise leave it the so called Experts & Invest in Mutual Fund (People say SIP is a better Route – Law of Averages) and HOPE FOR THE BEST
gurdasvarma – Thinking of stocks as a minute by minute game is incorrect. Peter Lynch said it is not timing the market but the time in the market that determines the returns.
Most of my stock purchase were made in 2003/4 and then I had to travel. Those stock returns have all beat the Mutual fund returns by a wide margin over this duration because I was able to hold them ‘ALL’ through the complete downturn of 2008 (ofcourse partly because I lost my trading account password and I was travelling abroad for work and did not get bombarded with market sentiments each falling day!).
For the person with a serious passion and temperament stocks are the best bet. But for a majority of them MFs are the best bet for there are no other better avenues to beat Inflation in the long run
Nice article.Investing in mutual funds simply give enough exposure to the returns/risks of direct investment of shares where we have some one to take care of them every day activity and over the long term we can expect a good return.It is not sure that we will get good return over a stock investment as it is highly subjected to market conditions where after some time it may not come back and shine but the rise and fall in mutual fund NAV is not that much drastic so that we can relax a bit.
Thanks for your views !
Sorry, couldn’t find this article worth reading or sharing. It is just an introduction to what is Mututal Funds but not a good comparative analysis of shares and MF. AMC will take its own share of profits, cost of running the fund and yes huge benefits/bonus to fund managers and the remaining is for the actual investor while if I invest in shares it will be my own investment.
Take top rated MF, take their top 5 investments and proportion of funds they are investing, put your own chunk of money into the same list of stocks. Compare it with investing directly or through a MF.
At any given point and any given day, direct investing in stocks will give higher returns than MF. Don’t forget even AMC do a direct investing in stocks.
I question the credibility of stating diversification will give good returns for MF than direct investing in stocks. No one will stop you investing in multiple sectors.
YEs this article is for begineers , you might find it basic 🙂 . A lot of people do SIP in stocks , a lot of people feel picking a stock and not looking at it for 2 yrs if fine , just like Mutual fund .. hence the post !
Diversification is for reducing risk to the portfolio for the same unit of return.
Direct investing needs so much temperament. If a Satyam like event occurs in a 5 stock portfolio then the entire portfolio can be wiped down 15-20% in the same day. An already beaten down investor will just exit the market completely and lose the golden opp to make money in the markets. Mutual funds will reduce at most 3-4% even when such a catastrophe strikes.
It is very easy to say that people must dump the losers and buy more of their winners. Very difficult to implement for someone who has just see a significant wipe off from the market value.
Even when the markets dont tank like the Satyam event the individual portfolio will undergo sea changes than a MF portfolio and impulsive decision making is possible. MF investment reduces that.
I agree with you that a direct stock portfolio can beat MF returns big time but not too many people have the time, ability and temperament to do it. So faced with a +40% to minus 20% range of return in a direct stock portfolio most risk averse investors are better off living with a minus 10 to +25% MF return.
I agree with you.
I agree. Risk appetite and capacity to take risk is important. Most investors do not want to take the risk of losing a substantial portion of their investments.Greedy investors also learn their lessons after losing money.
When the mutual funds were first launched the idea was to provide a vehicle for investing to the small investors who did not have time to do research and enough money to invest in costly bluechip stocks. MFs provide the additional benefit of professional management and diversification to reduce risk. Then you don’t need a demat account for investing in mutual funds. You also have the option of investing in different asset classes like debt, equity and gold. Hybrid funds provide the benefit of automatic rebalancing.
If anyone has any aspiration to become Warren Buffet then he should invest in stocks. For other new investors they should opt for MF through SIP
Thats a good way of differentiation !
First try to become Rakesh.
Good one sir! 😀
Just some cautionary notes:
Rakesh has access to so much information that we ordinary investors don’t have.
Rakesh is so idolized that even if he makes a stupid investment, he gets the benefit after his holdings are published a month later. Just see what happened to Aptech recently. Noone wants to buy it back from him.
You don’t have to be a rocket scientist to figure out what stocks are good. Just pick some FMCG (for example) like HUL or ITC or a giant like L&T and you are not likely to fail in the long run.
Every Tom, Dick and Harry recommends the SIP method to invest in MFs. It works as long as the market is on a trend of growth (with fluctuations in between) but just take a look at SIP performance between 2007 and 2012 and you are likely to very disappointed. SIP (IMO) needs a little bit of timing to be on and off and that has to be learnt by experience. If anyone wants to start SIPs, now is a good time to start.
Nevertheless, there is a lot that one can learn from his investing philosophy.
SIP is just a mode of investment. It is not a magical prescription which will give you good returns under all market conditions. The main idea of having SIP is to invest under all market conditions without trying to time the market. There is no particular good or bad time for SIP. SIP can be started any time. Timing is required for lump sum investment and not for SIP investment. These days many fund houses have come up with tweaked SIPs where some timing element is introduced to increase or decrease the amount of SIP based on the condition of the market. Personally I feel that plain vanilla monthly SIP is the best.
Granted that SIP is a very good mechanism for investing. I did a sample of SIPs started on Apr 1st of the past 6 years to examine the IRR (Internal Rate of Return) in a specific fund (HDFC Equity which is a very good multicap fund). This is different from the NAV growth that fund houses advertize. Here is what turns out:
Start Date IRR
Apr 1, 2011 4.45%
Apr 1, 2010 0.26%
Apr 1, 2009 11.72%
Apr 1, 2008 17.09%
Apr 1, 2007 13.84%
Apr 1, 2006 13.66%
(Please note that the stock market crash of 2008 enabled the high return for the investment starting Apr 1, 2008 and I would treat it as an abnormal return. That is a classic scenario of doing a lump sum investment when most investors are extremely pessimistic – the Warren Buffett philosphy.)
While the returns in the 2006-09 timeframe look reasonable (not great), the returns during 2009-12 are just pathetic. Fund houses like Reliance were in fact charging 2.5% for SIP investments. So it was more of an advertising tool to take in funds for the the fund houses and not a great deal for the investor.
My suggestion to anyone going the SIP route: You still need to get familiar with how it works, know more about the fund manager and the fund (or alternatively go for the best rated funds) and need to monitor it periodically. There are tons of funds which have disappeared over time or merged with other funds (erstwhile Alliance Basic) or have suffered performance degradation (Reliance Growth, JM Basic).
I respect your points and your perspective but having suffered from the poor returns over time on SIPs, I don’t trust the vanilla version for longer time periods. Over a 1-year and 2-year period, SIPs look a very reasonable option.
I agree with what you have said. My point is that if we don’t get good returns from our funds we have to blame the funds, fund managers and fund houses and not the SIP which is just a mode of investing. It is clear that if we select a fund merely based on its past track record it is quite possible that its performance can falter in future as has happened in the case of HDFC Equity, Reliance Growth and many more funds. We have to understand that investing is a dynamic process. We can not afford to sit tight on our portfolio. It has to be regularly monitored so that nonperforming funds can be weeded out.
There are some funds like UTI Opportunities and ICICI Prudential Focused Bluechip Equity which have done much better than these HDFC and Reliance Funds.
Just a word of caution… HDFC Equity is not a peer of UTI Opportunities or ICICI Pru Focused Bluechip Equity and it is not a level playing field to compare.
UTI Opportunities is a Large and Midcap fund.
ICICI Pru Focused Bluechip Equity is a Large cap fund.
HDFC Equity is a Multicap fund.
I am a shareholder in all of them and they are all good. No objections. Plus they all originated at different times (ICICI one starting just 3.5 yrs back).
I understand that you have to compare apples with apples and not oranges. What I was trying to say is that it is not certain that the top performers of the past will perform in future also and even five star funds of HDFC can falter. Funds can lose and gain stars. So tracking is a must.
In multicap category Quantum Long Term Equity has given comparatively better returns.
Quantum Long Term Equity is a great fund having been a top ranked fund (courtesy Value Research) for the past 5 years. HDFC Equity still has the edge in 5-yr returns btw. But it is not an ideal fund for most investors for the following reasons:
1. Assets under management (AUM) is a low 90 crore while HDFC Equity has a AUM of around 9200 crore. Value Research requires a fund to have a 5 crore AUM to be rated but there is no other requirement on AUM.
2. Quantum markets itself as a direct-to-investor fund and is not available through any of the distributors (I have check HDFC, ICICIdirect & Citi but FundsIndia seems to be offering it). That is a risky way of growing the consumer base since in India distributors are quite crucial. It has been my experience that managing through an aggregator is much simpler than managing directly with a fund house. The earlier point about AUM is a direct result of being direct to investor.
3. Quantum seems to diversified into multiple other categories (Index – AUM 2 cr, Equity FoF AUM – 3 cr, tax Saving – AUM 4 cr, Liquid – 30 cr) trying to find acceptance but not being able to get investor attention. For investors with a timeframe of 5 years and beyond (think retirement), Quantum doesn’t fit the bill. When Fidelity AMC accumulated losses despite its flagship Equity fund clocking 3370 cr in AUM and being top rated almost the entire timeframe, things could be worse for smaller funds. It is possible that Quantum might have different purpose but I haven’t seen any details of it.
I do recognize that the fund could fit an individual investor’s choices but it is essential that they factor in the above factors and make an informed decision.
Just want to correct the statement “HDFC Equity still has the edge in 5-yr returns btw”. Quantum has the edge in 1-yr, 3-yr and 5-yr returns over HDFC Equity based on the current NAV.
Before I started investing in funds of Quantum Mutual Fund I also had apprehensions.Then I got the opportunity of listening to Ajit Dayal. I have read his articles and I am quite impressed with his philosophy.The main advantage of their funds is low charges which makes a lot of difference in the long run.
For the one who has the time, acumen and more importantly temperament direct stock investing can provide the best long term returns. However a majority of the population does not have time. Even if they have the time they do not have the acumen to pick the right stocks in line with their risk taking abilities. And mot importantly: Even if the right stocks are picked one needs the temperament to hold on as long as the fundamentals are not broken,[A Technical pattern forming over 100 days can be easily broken in 3-4 trading sessions.Fundamentals do not change overnight).
Given these factors MFs are a better route for a majority of the population.
thats the reason this post was written so that people can see which side they are in !
Invest in any of the fifty stocks of NIFTY n i m sure that for a period of 5 years and above the return is much more than any other top rated Mutual Funds.
Why do you think like that Harshit !
Dear Manish ji,
Crisil, one of the leading credit rating agencies in India did some research which showed that the benchmark indices perform better in the long run than most ‘professionally’ managed funds. This comes as a bit of a shocker given how much faith we put in the professional money managers. Here you are, paying a professional to do the best job he can, but when you realise that he isn’t doing so, as an investor and a customer, it sure does hurt.
Can you name the funds ? As far as I know and you can also see .. a lot of funds have outperformed the index funds by a very very big margin ! .. So what you are saying it true for some funds which are bottom of the pyramid !
I will give you a few examples which will contradict your original statement (about nifty components beating the top funds).
Just view the performance of BHEL, CIPLA, DLF and HINDALCO for the last 5 years (using the link http://www.moneycontrol.com/stock-charts/cipla/charts/C#C and comparing all of them). Compare the 5 year returns that you see there with the performance of HDFC Prudence (using http://www.moneycontrol.com/mutual-funds/nav/hdfcprudencefundg/MZU003). Mind you, Prudence is a balanced fund.
Returns are based on several factors. NIFTY is just one index which provides you a gauge for the market and never should wholly dictate what you invest in. My advice for you is to be stock specific.
Full Disclosure: I own Prudence for 8 years now. I am an unfortunate investor in BHEL on the way down last year and optimistic that it will recover in 1-2 years. 🙂 I own CRISIL too!
Probably yes but several of the Nifty stocks themselves lag the market big time over different periods of time. How does one guarantee they dont pick all 5 losers? Or even if 4 stocks gain and 1 lose how can they ensure they are at least getting the market return?
For long term investments both stock and MF investments are safe and good..it depends on what u pick and most importantly when u pick…one more good topic Manish…
Thanks for your views !
I always like to invest in stocks than mutual funds.
I am sure you have a sound knowledge of investing. I started around last Diwali- but sitting on losses. I (email@example.com) have been looking for a good book on analyzing stocks. Can you suggest please?
One of the best books that I have ever read on stocks (as a beginner years ago) was by Peter Lynch, the fund manager for Fidelity Magellan during its best times. Think of investing all the things that you use daily, the soap, toothpaste, razor, face powder, cosmetics (you can think of your wife’s stuff too :-)) etc. Translate that to the companies that make those products. If you have to use them everyday think of the company that gets its money everyday. Think of all things that the company does to keep you and your friend as a customer. That is a good place to start!
You can check out the comprehensive list at http://www.investopedia.com/articles/basics/03/050803.asp#axzz1rATHyNrL
(I recommend the ones by Jeremy Siegel too).
by chance i also started investing in stocks in last diwali only.
i started it by putting little amount and observing it. i invested in Tech mahinda and tata motors and am in profit.
Good to hear that .. are you into long term stock investing or you do more of trading !
For a layman – there is no fortune – he could believe in fake mutual funds too.
The pro is the stock investor , who could employ the best analyst in the country at a nominal rate. in this way his investements are monitored and verified by himself.
Higher returns fro the Pro.
So whats your suggestions for majority of people ?
I really agree with the above article.
For a lay man the best way of entering the equities is thru MF that too thru the form of an SIP in a good rated Fund whose exposure is more towards blue chips which can fetch a CAGR of 12- 15% over a long term probably 10 years +…
In MF the investors should always avoid NFO ….which is nothing but a marketing gimmick to lure investors to build the corpus in that fund ..
Direct equites should be only restricted to seasoned players …because todays indian markets is not driven by rationality … it is more of an operator driven where the strock is manupulated by the promoters ( small and mid cap) for their interest …it is now a no more a value creation tool unless and until the fundamentals are really strong like ITC , Colgate , Nestle ….
MF gives the diversification to the whole portfolio and stability .
For the wroking class majority should route through MF … the best tool for wealth creation in todays scenerio with medium risk
Good to hear your views on this topic . Layman should definately take mutual funds route !
Invest in mutual funds if
1. If you are new to stock markets
2. You feel that you have done B.Com or MBA and feel that you can read balance sheet well. But in reality, its difficult to analyze a stock/company. Balance sheet is not the only thing to look at. Other factors like valuations of a stock, market volatility and market cap of a stock, promoter and other factors have to be taken care of
3. Invest in mf (not stocks) if you feel that your sub broker or your close friend can give you a share tip. Mind you, the success rate can be below 50% for such tips
Invest in stocks (again not 100% portfolio) only if you yourself is a Research analyst with rich experience in analyzing stocks.
THanks for your comment Mayank !