By Nirav Karkera
Overall capital market participation has increased multifold lately with the pandemic being a super propellant. Recent years have witnessed a steep rise in participation in direct equities with record high Demat accounts being opened as well as capital market products like mutual funds also recording lifetime high investments. Through awareness and experience, India is now accepting equities as a mainstream investment product.
The next leg of this investor maturity cycle warrants decisions on the ideal way to invest in equities. The biggest dilemma often has to do with deciding between the glamorous direct route to investing in equity stocks through exchanges and rather popularly reliable mutual funds. There are different paths to God, and similar is the case for effective investing. This decision-making can be made simpler by understanding the key requisites to successful investing in either of the products.
How well do you know what you must know
The most important parameter to successful investing is knowledge. Whatever the product, one must be able to translate high-quality knowledge into successful investing strategies. For an investor seeking to invest in equities directly, they must possess a fair degree of understanding of macroeconomics, industry dynamics, business fundamentals, financial statement items and broader market dynamics. Unless one understands these vectors, it would be prudent to invest in mutual funds where the fund management team is typically proficient across these vectors.
There’s no workman without the tools
Developing knowledge has much to do with access to data, information and tools necessary to synthesise. Though most of this is available openly and easily accessible, it may be tough to access a structured and consumable version. Accessing consumable data and tools requires committing a meaningful amount of money along with technical training to use the same effectively. An individual having access to such infrastructure can try investing in equities directly or else can simply rely on mutual funds built on the basis of such infrastructure.
Being as good with time
Effective investing is practically equivalent to a full-time job. It is even if one is a long-term investor not trying to trade on a daily basis. The research, analysis and portfolio management exercises itself consume quite a fair amount of time. Those unwilling to or unable to dedicate a fair and requisite amount of time may find it difficult to achieve greater success in direct equity investing. In such a case, it is simpler to leverage the time and efforts of a qualified mutual fund management team to achieve investing success.
Discipline distinguishes effective from efficient
Discipline has a major role to play in successful investing. An investor must be able to set correct rules, align actions, review both, course correct and repeat the same at a set frequency. This is as much a matter of discipline as much as it is about doing it right. Investors unable to stick to a disciplined regime or have tendencies to give into cognitive biases will often be better off investing in a mutual fund versus building an equity portfolio through stocks directly
While these pointers assist in making an absolute choice between direct stocks and equities, the ideal situation may not be made of binary choices. Ones who feel confident about direct stock investing must also allocate a certain percentage of their portfolio towards mutual funds, especially to meet financial goals. On the other hand, those who feel that they may be better off investing with promising mutual funds must set aside an allocation to invest directly into equity shares so as to be able to learn and experience equity investing first-hand with an endeavour to build capabilities.
(The author is Head, Research at Fisdom. Views expressed above are those of the author. Please consult your financial advisor before making any investment decisions.)