Moving Money from Direct Equity to Mutual Fund

POSTED BY Samir ON August 15, 2012 4:00 am COMMENTS (21)

Dear Expert…

I have some investment done in direct equity (around 10 lac).. All of this more then 1 year old.

Slowly I realized that, I am not a active trader and nor do I posses necessary skills to analyze stock market. I should move this to Mutual Fund –

Q1 – Does it makes sense? or I can just keep in equity (FYI my investment is in TCS, Maruti, Bharti, ICICI kind of blue chip companies) 

If the answer to Q1 is Yes then

My Naive mind can think of few approaches –

1) Sell all of them at once, distribute proceedes in few large cap funds

2) Sell all of them at once, move money to Debt fund and do a STP and invest in large cap funds.

3) Sell selective stocks occassionaly and move the money to Large Cap funds.

What can be best approach… Any other approach?

21 replies on this article “Moving Money from Direct Equity to Mutual Fund”

  1. Do a very simple math. Take your portfolio of 10 lacs and look at the return in the last 1 year or so. Compare the return with some of the top rated mutual funds. If the results are comparable/better  Then understand that you might not have been better off having invested in a MF. Just that thought alone is enough to kill the feeling of guilt that you have made a wrong decision investing in direct equity.

    Next: Be honest to yourself and ask why you invested in Direct equity in the first place. Quick/instant money? Dividends? Or you can create a better portfolio than Mutual funds? If the last response is correct (honestly correct) then with hard work you may be able to build a very good portfolio. But remember that it is a tough road ahead. Be prepared to see significant failures in Direct equity route. This is why if you are really a beginner to direct equity then you must not spend more than 5-10% of your investible surplus into direct equity. Opt for MF instead. In that case sell your losers (not winners) in Direct equity and move to MF in weekly SIP mode over 1 month – no more. You can also do a bulk move but if market tanks immediately thereafter you will question yourself if the move to MF was even warranted which is why I am asking you to move the money in weekly SIPs for 1 month.

    In parallel grow your direct equity portfolio. In few years you will know where to focus.

    I have personally made a reasonable shift from Direct Equity to Mutual funds – not a DIRECT ‘move’ as such but kept my equity portfolio intact and most fresh/new investments over the past 3-4 years have been diverted to MF than to Direct Equity. Direct Equity is a very rewarding activity if you take the emotions and greed out. But like anything else train yourself before taking a full plunge.

  2. Sachin says:

    What is your current problem ? is it that you check your portfolio daily online and gets upset if it shows fall of 5% on some day ?
    Do you need money in short term ? If answer is YES, then exit AT ONCE.
    If you do not need money for next 5-6 years (passive investment), then stay in the market and try to learn more about companies in your portfolio and also outside.

    You said “nor do I posses necessary skills to analyze stock market.” My friend no one posses this skills from birth, not even Warren Buffet…every one here learn by their direct experience and from others experience. Read good blogs/articles/books on investing.
    I know this may be lot of faltu gyan, but remember a thought —
    “Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime”.
    Suggesting few good mutual funds name for investment is very easy but i don’t want to do that !!!
    Thanks, Sachin

  3. Atul says:

    Hi Samir,

    I suggest you use Decision tree and list down the options based on the probability.

    There is no hard and fast way of arriving at X% to MF and Y% in direct equity but your experience, future projections and current needs will be key decision factors.

    Let me know if you need help here.

    Cheers

    Atul

  4. Samir says:

    Thanks Experts…

    BRSingh… Question –
    Any specific reason to suggest FD (Even for 10% of value as suggested by Ramesh)… I thought Debt Funds are more tax efficient specially for tenure more then one year.

    1. Ramesh says:

      10% is for Direct Equity only. Not for anything else.

      But do check about your asset allocation and other basic stuff like insurance and emergency fund, etc.

      In my opinion, direct equity > FD (or any other debt instrument) > equity MF is not an optimum way, provided your asset allocation is good.

    2. BRSINGH says:

      Sameer,

      If you want to start in MF (whatever categoy MF you like ) then how you want to do? Do you want to use the whole 10L at once in MF or will you start SIP in MF.

      If you start SIP in MF then how much do you want to invest per month? I suppose 10K per month you want to invest in SIP.

      So from where you can get this money? My suggestion that do a fixed deposit of 10L so that at 9.5 % interest it will return around 95K per year (you need to consider if necessary). So this amount will help you paying the SIP every month. Also the 10L will work as an emergency fund for you.

      As per my knowledge SIP is better than one time investment because it will average out the investment every month. Now you can do a mixed type of investments in MF like Lagre Cap MF, Multi Cap MF, Debt MF, etc.

      1. Ramesh says:

        Samir,

        The above mentioned is exactly what you should not do. 😉

        1. BRSINGH says:

          Ramesh,

          Do you suggest Sameer to put all his money at one go in a single fund? It will be simply foolish to do that. What if a he loses 30-40% in this volitile market condition again? SIP is always preferred in MF. Also its always preferred to put money in different types of MF.

          Sameer,

          My approach is just one of the many. If you like that then go ahead, i dont think you will do any mistake. But if you put your money in a single fund then it can be very very risky.

          1. Ramesh says:

            Yes,

            I suggest exactly that. Refund 9lakhs, and then put that into a single fund on another day. And enjoy the comforts of passing the active management to an experienced fund manager (if active fund management) or ride the passive indexing wave, whatever be the single fund.

            Get above the myopic loss syndrome. Equity investing is anyways not for short-term.

            A decently managed MF has 50-100 stocks, or maybe even more in some cases. So, that is more than adequate diversification.

            Do you mean to say, putting money in a single equity MF can cause you loss of 30-40%, BUT if you put the same money in 5 different equity funds, you would not get that much amount of loss? Who says ‘it is always preferred to put money in different types of MFs’? In my opinion, a single fund is as good. You just need to identify one good fund and then stick to it.

            OR you want to say, by putting money in FD, you are decreasing risk. Think for a while, he has got money in many stocks with a very bad diversification (too much into a single stock). A balanced diversification is a better thing than that. All debt funds including FD are risky too, albeit with a different risk than equities.

            As always, we can agree to disagree.

        2. BRSINGH says:

          Just check my answer i haven’t suggested to keep money in FD to reduce risk. I only suggested to keep money in FD to generate enough money to invest in SIP.

          “Putting all the money in single fund” : This perl of wisdom is never suggested by any of the experts or gurus in the entire financial market in this entire world. It does not work in reality. I dont even have to prove you wrong for this.

          Anyways i think the topic will be distracted if we both debate more. Let Sameer say what he is going to do. Thanks!

          1. Ramesh says:

            Do check out some recommendations of Benjamin Graham (The Intelligent Investor), Warren Buffett (on Index funds), John C Bogle (of Vanguard funds) and our own Subramoney.

            Enjoy.

          2. TheZionView says:

            @BRSINGH

            i think you got it wrong on what Ramesh is trying to say.

            This 10L is not a fresh money its already in the Stock market,now what he is trying to do is shift the management of this money to active management which comes with charges in the form of Mutual Fund. So drawing out 10L from non-diversified stocks into a diversified Mutual Fund is not a bad call.

            On the other hand your suggestion will be ideal if its a fresh money (meaning got as a gift/bonus/through some sale) will work out fine to mitigate the volatility by doing SIP through SWP/FD.

            This case is moving from equity to equity which need not be made into multiple times.

        3. BRSINGH says:

          @TheZionView

          May be the other way round.

          In my original reply i told that it is one of the various ways and most probably the safest one. Its up to Sameer. I am not saying that this is the best way or what Ramesh suggesting is bad. My reply was to give my reasons to Ramesh why it can be one of the options worth considering. I dont think i denied anything what Ramesh suggested in his original reply.

          1. Ramesh says:

            Do some data-crunching and then prove how your approach is the safest one. Safety this way may cause a significant opportunity cost (that is a big risk too).

            Eg.

            Suppose it is 9 years ago. Same situation.
            1. He followed your advice. Put his money in FD and got a great return of say 8k per month (96k per year with the principal intact; leave out taxes, which will eat into it) and which he put in HDFC Top 200 or HDFC Sensex fund (an eg of active and passive).
            2. If he followed mine with 100% money. All 10 L in any of the two funds.

            Check results through VRO.
            Scene 1, plan A: HDFC Top 200. Amount invested 8.64 lakhs. Value = 20lakhs (17.7% CAGR) + the principal of 10lakhs. Total 30lakhs.
            Scene 2, plan A: HDFC Index Sensex. Amount invested 8.64 lakhs. Value= 13.5 (9.6% CAGR) + the principal of 10 lakhs. total 23.5 lakhs.

            Scene 1, plan B: HDFC Top 200. Amount invested: direct 10L. Present value=75 lakhs.
            Scene 2, plan B: HDFC Index Sensex. Amount invested: direct 10L. Present value=37 lakhs.

            Do it for any good fund, over any period of above 5 years. Try with any combination of funds too, from 1 to whatever you feel comfortable.

            SIP is always better is a myth. It just depends on your own circumstances and how the markets behave in future, which is an unknown entity today. In my opinion, it is not a good idea to do SIP, when you can do a large lumpsum particularly when you need to adjust your asset allocation towards equity. Equity Markets will always be volatile, that is their nature.

        4. BRSINGH says:

          @Ramesh

          Suppose 9 years back Prashant Jain did not join HDFC fund and suppose HDFC Top 200 hundred turned to be a crap fund now then what do you have to suggest. In MF there is no gaurantee, there was no gaurantee and there will be no gaurantee.

          You follow your conviction and suggest, i follow my conviction and suggest. We can not impose what we think on each other. I think we can put an end to our distracting debate and let others reply what they think. Sometimes “Too much analysis leads to pralysis”. Have a nice day.

          1. Ramesh says:

            I understand that. It is just that I am trying to give reasons for my conviction. Before claiming, the safest and potentially good/best, you should have provided some data or reasons.

            Prashant Jain has been managing money since around 1994, if I recall correctly.

            HDFC was just an example. It is presently a 4star fund. But my analysis should work with any of the reasonable good funds at that point in time. Not from today’s data. I also know that any data crunching canbe a specific data mining and potentially wrong.

            This debate and forum is not only for Samir, but also for many others. I do not think this is distracting. Analyzing a situation in a healthy manner cannot be bad. Enjoy.

  5. TheZionView says:

    You might have bought the bluechips like TCS, Maruti, Bharti, ICICI etc but the time you bought is also important.

    You might be seeing some good loss in maruti,bharti over the last year. It might be temproary or permanent we will never know until you are ready to watch the market every quarter for their results and decide based on that.

    If you wanna take blind bet then leave the 10L there and forget it for 10 years.
    If not then sell everything and put in good MFs

    1. Samir says:

      Thanks for Reply BR/BanyanFA/TZV…

      I did lost some money in recent melt down. But my thinking is this is temporary situation.
      This will improve in a year or so for sure. (Kitne Din Chalega Recession…)

      70% of my investment is in TCS that I purchased in IPO.. Appreciation in TCS actually compensates pretty much all my losses till now 🙂

      I think, I will keep ICICI, TCS and Maruti… and rest (Idea, Bharti, Power Finance etc) I will sell and move to equity MF…. It will just diversify..

      Thanks again for taking out your time and sharing your inputs.

      1. Ramesh says:

        From the discussion, I get the impression that you have a fairly decent knowledge and confidence about the behavior of equity markets.

        However, you probably lack the real knowledge and/or the time to analyse individual companies. Eg, IPO investing, 70% in one company, only blue chips, etc.

        My advice:
        1. Sell 90% (atleast) of your equity portfolio and put that money into a single fund. Preferably a fund which is not restrictive to only large caps. Allow the fund manager to work anywhere.

        2. The rest 10%, use that to get a re-structured set of stocks, and continue enhancing your knowledge.

        This way you will reap the benefits without taking too much risk.

        Do this as option 1. Directly in one day, no point in timing.

        Remember First do no harm.

  6. BanyanFA says:

    Samir,
    Good though process. I would advice you to review your stock portfolio and primarily try to limit it to good blue chip names which won’t cause shocks in future. This portfolio would then continue to grow over time as well as pay you regular dividends 🙂

    Any further investment amounts can then be started via Mutual Funds via SIPs.

    Regards
    BanyanFA

  7. BRSINGH says:

    There can be many options. I am just telling you one of them. If you dont think that you are good at following up share markets and take decisions then please sell all the share at once. Keep 10L in FD and whatever interest you get please start SIP in good Mutual funds. I think you will get good enough interest from 10L FD.

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