It is an accepted fact that equity (stocks and MFs) have the power to deliver handsome returns over long time frame. However, many direct equity investors lack the ability to deal with the complexities that is required in dealing in stocks.
No expert is able to predict the right time to enter/exit a particular stock. There are innumerable stories of success and despair relating to stock market. The biggest hurdle for the direct equity investor is the buy list. It is the easiest thing to do. The key to making profits is “it is when you sell that counts.”
Indian equity markets are aligning to global markets and with increasing number of Indian corporates raising money from abroad, the factors affecting a particular company have become more complex, more varied and all the more difficult for an equity investor to comprehend. Media is agog with buy list daily. However, this freebie is fraught with too many risks. One of the biggest risks being biased advised being doled out. This is more applicable to investors who take buy decision based on “tips” given by brokers and experts. This noise creates a halo around a stock and more often than not an investor falls prey to such noise. The resistance to buy decreases as the price increases. Past (price) performance however compelling cannot be the guiding factor to buying a stock or a Mutual Fund.
One more reason why direct equity investors buy is that every body is buying. This is commonly referred to as herd buying. The basic assumption being that so many people cannot be wrong. The other reason being momentum buying. The information about most traded stock, stocks with high delivery volume and the stock which has risen most are daily published by business papers. This supports momentum buying. However, the fact that this momentum can wane as quick as it had rose is seldom factored in by buyers. Buying suddenly vanishes and investors are left with stocks quoting at a fraction of the price they were bought. It may go down to zero as well.
It is rather more easy and simple to choose a fund. The fund manager is more suited to build and manage a portfolio of stocks as he has far more resources --in terms of money, information and expertise—at his command.
Rather than compare performance of individual stocks against the fund, investors should pit their entire stock portfolio against the fund and see if their stock portfolio has been able to beat the best of the minds in fund management. 2.50% Fund management charge and your advisors fees are a small price for a far simple way to create long term wealth.
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