We all at some point of time have lost money because we are not equipped to time the market all the time or most of the time. Though shares offer tempting returns it is surely not easy money. So, it's always advisable for investors to take the mutual fund route for investing in shares especially when we see the stock markets falling by more than 450 points one day (June 4) and rising by more than 250 points (June 5) the very next day.
There has to be a reason or logic to justify the above statement. Let's ask some questions and answer them ourselves honestly before reaching any conclusion.
Question # 1: Can you buy 10,000 SBI shares or 5,000 shares of Reliance Capital on your own steam?
If yes, investing in shares directly suits you. If not then consider mutual funds as your best friend.
One gets the benefit of pooling of resources in mutual funds which results in proper diversification of portfolio. A diversified portfolio is less risk prone and gives healthy returns over a period of five years.
A friend of mine was very bullish on the infrastructure sector and was willing to invest in companies belonging to this sector a couple of years back. With his limited resources he could afford a bit of GMR Infra or L&T or JP Hydro. Sanity prevailed and he went in and invested in Tata Infrastructure Fund; though the stock market melted post January 2008, his fund value still remains in the green (profitable).
Question # 2:: Where does Tata Steel buys Coke from? Name Infosys' top five clients in the USA?
If you know the answers to both the questions above then again you can invest on your own. If not, go for mutual funds that invest only in blue chip companies.
An investor is not supposed to thoroughly track the balance sheets of companies (they give you a sense of a company's profitability), nor is he supposed to know the minute details of the companies, markets or global economies.
When we can outsource the same to the best people in the industry (read fund managers) then why do it ourselves. The knowledge and capability possessed by mutual fund managers always give them an edge over an individual investor like you and me.
Question # 3: Can you track the market for more than five hours every day right through Monday-Friday (Stock exchanges begin business at 9.55 am and close the day at 3.30 pm)? Can you hire people to manage your portfolio?
If yes, investing directly in shares is your cup of tea, if not you know what to do by now.
As stated earlier, timing is very important in stock markets to make money. For instance, if you have invested money in 2005 and sold all your shares by December 2007 you would have made a neat chunk of money for yourself. Alas, that must not have been the case!
Out of thousands of companies listed on our stock exchanges to ascertain which is the right time to buy or sell is a tough nut to crack. Investors with small portfolios find it difficult do it and end up having inferior portfolios.
MFs have full time fund managers, well-established and professional research teams who are paid to do good research on stocks, to closely monitor them day in and day out and to update/churn (buy/sell) the portfolios regularly with the express intention of giving good returns to the investors.
So, if you are the one who likes to have complete piece of mind, decent appreciation and accumulation of wealth in the long term mutual fund is the right answer for you.
