Mutual Funds or Direct Stocks, Kya Sahi Hai ?

Greetings from TAG Investments !! Nowadays there is a discussion between whether Mutual Funds sahi hai or Direct Stocks sahi hai.

And why it became a topic of discussion, because during the lockdown markets performed really well.

Look at this graph, in the month of March the Corona cases were much less and the fear of coronavirus was much high and see in the month of June the Corona cases have actually gone up but the fear of coronavirus have gone down.

People gradually understood that India is such an economy that it will not be in trouble for too long. By financial year 2022, India’s economy would recover substantially well.

Month of March 2020, Sensex was around 25,000 and in month of June-July 2020 the Sensex has reached 36000, absolute growth of almost 35% in 3 months.

The good part is that in the small cap and mid cap segment, where from last 2 years we could not see any recovery or any upside in the prices, we noticed that in the last 3 months even the small cap and mid cap gave almost equivalent return of 30 to 40%,  which means a broad case recovery or rally also started in the last three months. Additionally, we have seen some stocks performing really well (multi-baggers) and returns are more than 100% in 3 months.

In such an environment, an investor who has invested his money in mutual funds would surely get this question in mind whether mutual fund sahi hai or should he change his way to some other asset class? Please understand where there is a challenge there is an opportunity and where there is an opportunity there has to be a challenge.

To understand further, first let’s talk about what are the rules of the market :

Why Sensex rose to the level of 36000 from 25000, there has to be a reason behind it and the reason is excess liquidity in the market.

Bank fixed deposits are at their all time low, if you deposit your money in the bank today, it will almost take 13-14 years to double your money (Given then interest rates ar between 5-6%)

When the Bank fixed deposits started giving low returns, some of the money was diverted from bank deposits to the stock markets and hence a sudden flush of liquidity in stock market was seen.

Because of the uncertainty in the businesses, people are not investing excess cash in their  businesses and hence that money also is being diverted to the stock markets.

Real estate, where people put in most of the money but because of the liquidity constraints in real estate, people are not wanting to invest in real estate and hence again that money is entering into the stock markets.

As evident from the above image there are three wealth creators

Business 

Property

Equity

As explained above, other than equity as an asset class, investors are holding on to take further exposure in property and business.

I recently got a call from one of my investors saying that he happened to go out for lunch with one of his colleagues and they were discussing mutual funds and stock markets. Much to his surprise one of his colleagues told him that he has made good money in the stock market from the last 3-4 months. Again in the evening that day, the same investor happened to talk to one of his other friends and his friend also said that he is using a trading mobile application and he has made around 50% returns out of stock investing. So the investor called me and he was discussing as to what should he be doing with his mutual fund Investments?

So basically we need to understand what is the pattern of the market to understand his concern and answer his query.

Let us look at this chart, as per the chart in Jan 2018 Sensex made historic high of 34433 along with small cap and mid cap indexes. However if you notice in Jan 2020, Sensex again made a historic high of 42078 but the small cap and mid cap did not catch up with the sensex.

What exactly was happening is that only 15-20 named stocks were performing in the last 2 years from 2018-2020. Any to all mutual fund investors were complaining that sensec (market index) is rising whereas the NAV (net asset value) of their respective mutual funds are not rising as per the sensex (market index)

During the lockdown, things actually became different. Look at the above data in Jan 2020, the market cap was 160 lakh crores in March 2020, then the market cap dropped to 102 lakh crores and in June 2020 it rose again to 141 lakh crores. This time we also saw a broad based recovery happening where small and mid cap stocks also rose substantially. 

If you are interested to enter the markets you need to first understand the rules of the market.

Markets are of three types of market:

Trending Market

Directionless Market

Volatile Market

Nowadays, the market we can term as a volatile market. Directionless market is something which has no upside or downside projection. Trending market is where we see a trend which is either up or down but nowadays we are purely into a volatile market which is news and noise driven.

Look at the last 25 years chart, not every year as an investor you get an opportunity to invest in the stock markets.

The red colour shows that there was pain in the market, the blue colour and the green colour shows that these were good times when you could invest in the market. 

What will happen in 2021-2023 is something to look out for ?

My message to all of you is clear: the last three years namely 2018-19-20, as investors we have not been able to make money and markets have not given the investor an opportunity to make money. That does not mean that you stop investing in mutual funds and you discard mutual funds as an investment asset class and enter into a different asset class or financial instrument altogether. If you discard mutual funds as an investment option, alternatively you need to enter into direct stocks and if you want to build a portfolio in direct stocks, there is a rule of building a portfolio in direct stocks.

If you want to make an ideal portfolio in direct stocks, you will need to take exposure in 6 to 7 sectors  and you have to be wary of the fact that you should not be taking more than 30 to 40% exposure in one particular sector and in one particular stock you should not be investing more than 15% of the investment corpus. Also you should not be under invested in a particular stock like less than 3% of your total portfolio in a stock is meaningless.

At the time of equity investing, you also need to look at what kind of investment strategy you should follow, whether it is value strategy; growth strategy; contrarian strategy; quantitative strategy; or quality strategy.

All these parameters factor into before you invest in stocks and if you feel these are too many things to take care of, then you should stick to mutual funds. That is why we say Mutual Funds Pahle bhi Sahi the, Aaj Bh Sahi Hai aur Kal Bhi Sahi Rahenge.

You need to understand that fund managers of mutual fund schemes, before investing they take care of all these parameters which we have discussed above.

Now we are at 36000 levels in Sensex, what should we be doing as an investor. You need to sit with your advisor and discuss whether the allocation in mutual funds have been correctly done and if there is any rebalancing which needs to be done.

Look at various parameters, how much risk you want to take; what is the time horizon you want to stay invested till. There is a great opportunity which lies in front of us between 2020-2030  but this opportunity should not be taken as an excitement and proper planning needs to be done as far as your investments are concerned.

Follow the investment process which says that you should understand the business in which you invest in;  you should look at the long term economics whether it is favourable for the business which you are investing in;  look at the margin of safety and management of the business.

Now say you have 25 Lac INR to invest, you need to segregate that 25 L into say 10 L INR in direct stocks and 15 L INR in mutual funds; and then make a good basket of stocks. In case if you feel that making a basket of stocks is tough then just stick to mutual funds and have an asset allocation within mutual funds in various categories like balanced funds, multi cap funds, small cap funds, mid cap funds and  large cap funds.

Both mutual funds and stocks behave differently so you need to do your asset allocation in the right manner with proper planning.

Look at the above chart, in terms of asset allocation there are wealth creators and there are wealth preservers; you need to make a choice as to which part of asset allocation suits your risk appetite and your investment time horizon.

Even in mutual funds if you see the above chart, they have generated 25-35 % in the last three months which is almost equal and to what overall stock market returns are. So it isn’t that mutual funds have not actually risen from the last 3 months as compared to the stock market. 

There is an advantage in mutual funds, you can always average out in mutual funds as compared to stocks because mutual funds is a basket of 30-40 stocks and sector wise allocation is already done in mutual funds; whereas in direct stocks it is very difficult to average out on one particular stock and it gets too risky.

Given that if you have all the time in terms of doing analysis by yourself when it comes to stock investing, then welcome to the world of stock markets and you should invest in stock markets and in case if you think that all the above said parameters does not allow you to do so much of study in stocks; then mutual funds sahi hai and you should continue to invest in mutual funds.

Mutual funds has always been a favourable product when it comes to investing. Mutual funds kal bhi Sahi the, aaj bhi Sahi Hai aur kal bhi Sahi rahenge;  Only what you need to do is proper planning and asset allocation.

Do the above and for rest of the things, just leave it to the markets and you would make money.

Thank you !!

Published by Anuj Gupta

Hi, my name is Anuj Gupta. I am an entrepreneur, mentor and advisor. I am a finance professional with over 10 years of experience and I have worked with financial services giants like Merrill Lynch, Bank of America and I have also had the opportunity to work with start ups with a niche in investment banking. I am an avid traveller and I have had the chance to interact with lot of investors worldwide. I am the founder of TAG Investments, a wealth management and taxation services firm. We are registered and licensed with Securities Exchange Board of India, Insurance Regulatory Development Authority and Ministry of Corporate Affairs.

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