Mutual funds: The best route for investors

If you are unwell or facing some sort of medical conditions, then what would you do? Answer is to visit the doctor and get right medicine for the cure. Similarly, you hire a chartered accountant to seek help on Income Tax matters.

In the above two instances, you are seeking help or assistance from a professional who knows the subject well and can give you a suitable solution.

On the other hand, managing personal finances or making decision on investing have largely been driven by self-expertise in India.

Making prudent investment decisions requires specialised skill sets whether it is to do with asset allocation or choosing funds/ stocks. This is a full-time job and investing in stocks primarily on hearsay or Tips without sound research could prove to be very futile and lead to many accidents.

Retail investors

Retail investors should use mutual funds to take exposure to equity markets, as that would give them access to full-time fund managers working 24/7 on analysing stocks and then making investment calls.

The investment bets taken by fund managers are backed by solid research which both quantitative (studying balance sheets) and qualitative (speaking to management/ company visits) to ensure that the company has long-term prospects for wealth creation.

In our experience, we have seen retail investors who invest direct in stocks generally end up owning far too many stocks in their portfolios. This results in earning as much as the market returns or even lesser.

Buying on price without understanding value of the company leads to loss of capital and in hope to recover the capital some of the bad investment decisions become long term holding in the portfolio.

Another nuance in direct equity investing is frequent buying and selling of stocks based on price movements which lead to additional costs, as every time there is a trade there is a brokerage cost to be borne by the retail investor, many times cost of churn is higher than the actual return made by the portfolio itself.

Another interesting observation is that we have often seen allocation of money in various stocks owned by investors; there could be a case of over or under owning or owning small quantity of many stocks. All these reflect in the portfolio because stock selection is one thing but stock allocation is another.

In case of mutual funds, fund managers ensure owning fewer number of stocks and at the same time creating a diversified portfolio to spread the risk across various stocks and sectors.

They also valuate companies to ascertain which companies need to be held or otherwise exited from.

Some of the other benefits of investing through mutual fund route is that they are tax efficient, low cost, transparent and well regulated by the Securities and Exchange Board of India (Sebi), which has prescribed investment practices and frameworks that are investor- friendly and their interests are kept in mind.

For retail investors, mutual funds also offer SIP (systematic investment plan) facility to invest regularly and benefit from rupee-cost averaging. This has become very popular route to participate gradually and systematically with long term orientation.

All these will help retail investors immensely over a period of time in building wealth for their various goals and needs in future.

Happy Investing and always remember Mutual Funds Sahi Hai !!!

(The writer is Head-Sales and Distribution at Motilal Oswal AMC)