Is it easy to invest directly in stocks and beat mutual funds?

By Puneet Oberoi

Yesterday, one of my clients, who has been investing in mutual funds for some time called up. He wanted to know where he should invest for a period of four to five years. I was just explaining to him why he should invest the money in appropriate mutual funds, when he cut me short. He wanted to know whether he should invest in shares.

That is when I realized that many mutual fund investors don’t realize that investing in equity mutual funds is almost like investing in shares. I explained to my client that there is no big difference between making your own portfolio and investing in a portfolio created and managed by experts (fund managers).

Many people believe that they might earn more than mutual funds if they invest directly in stocks. This need not be true in most cases. Investors need to understand that it all boils down to the question whether they can create and manage a portfolio better than a mutual fund manager.

When you are investing in stocks directly, you might get fabulous returns in a few stocks. But you might also lose money in some stocks. Eventually, it will neutralize the returns. That means you will have to devote a lot of time to manage your portfolio. You would need to constantly check the returns you are making and compare it with the benchmark. You also need to look at whether you have beaten the benchmark in a particular period or not.

It is a full-time job. The fund manager is paid to do it full time. You have a full-time job which pays you the salary. Would you be able to devote enough time to the unpaid second job?

Here are some questions you should ask before investing directly in stocks:

1. Can you read the balance sheet of companies before investing?

2. Do you know their order books?

3. Do you understand macro and micro of economy?

4. Do you have time to do all this?

5. Do you really check overall returns of your portfolio?

6. And finally, will you be able to beat the benchmark?

(Puneet Oberoi is a Certified Financial Planner and Founder of Excellent Investment Advisors, Delhi.)

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