Unless equipped with right acumen, avoid direct investment in stocks

Assuming one need a basket of at least 20 odd stocks to create a well-diversified individual portfolio, the investment universe needs to be at least of 100 stocks.

At many a corporate training session I have addressed, there has invariably been a question on whether one should invest directly in the stock market or use the mutual fund route. I usually address this question by citing a National Geographic programme on an African lion, I once watched.

When the lion was young, it had boundless energy and often chased down the prey over long distances to try and make a kill. As it grew older, it realised the futility of expending excess energy in making a kill. Instead, it learnt to bide time and wait for the prey to come into a radius from where the kill would be successful, more often than not. The lion’s ‘kill’ rate when older was nearly double of what it was when it was young.  

The point I make is that, in my opinion, unless one has the time, energy and the ability to invest directly in stocks, the more optimal route available is via mutual funds. And even if one had the time, energy and ability, the moot question is, do you really believe that your ability to research and select stocks is really superior to that of a well-experienced mutual fund manager, whose decisions are also validated by detailed research presented by a team of well-trained and qualified analysts?

Assuming one need a basket of at least 20 odd stocks to create a well-diversified individual portfolio, the investment universe needs to be at least of 100 stocks. For how many direct participants is it realistically possible to research 100 stocks and monitor their performances every quarter? And yes, of course, one is presuming here that the universe of 100 and final selection of 20 stocks in an individual will be optimal ones. A tall task for most direct investors, if you ask me.

What really settles the issue is the fact that there is an ample universe of mutual funds, which have fund managers with vast experience and proven expertise built on a long-term track record. Moreover, the risk management and control system in-built into a mutual fund scheme is difficult for a direct investor to replicate. With SEBI’s new categorisation of funds, there is much better comparability on offer and the transparency in terms of a mutual fund’s performance versus its peers will be a lot more stark. This is a big plus for mutual fund investors.

Yes, there is an optically higher cost involved when investing in mutual funds, but very few rational investors will grudge a management fee if the sum they invested is professionally managed.
Why then, is the number of direct investors in stocks higher at this moment than those investing via the mutual fund route? Well, the thrill and glamour of direct participation is usually far higher. It is usually when the stock market starts trending downwards that wisdom dawns on many investors that they need professional help.

To conclude, if the ‘Lion in Winter’ could get wiser with age, so should investors.

Ashok Kumar
heads LKW-INDIA, a wealth management firm, and blogs at www.cricinvest.blogspot.com

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