No doubt that investing in equity seems to be very attractive option for investment. Why it so? We hear many stories, some true, some fictitious, of people who have become millionaire overnight. But the fact is, earning money is not at all easy on the stock market. Let’s accept this simple fact that it is not everybody’s cup of tea. So, we have to be very objective about it.
It is well understood universally that a diversified portfolio is less risky and much safe than a concentrated portfolio.
In India, small-time investors usually have a very limited capital for investment. Therefore, it follows that it is a lot more difficult for this investor with limited capital to have a diversified portfolio. In other words it is not possible for small-time investors to invest directly in the market and to make their portfolio diverse.
So, how can small investors get the opportunity to make their portfolio diverse? The only option left is investing in mutual fund. Mutual funds offer a well-diversified portfolio even with just Rs 100.
A concentrated portfolio, also, could deliver high or low returns. This means that, again, it is against the small investors’ investment appetite normally. It would suit only selected expert investors with high net-worth.
One more thing to notice is that with limited capital it is difficult for small investors to buy shares with high prices like ICICI Bank, Infosys, Reliance, L&T, and other blue chip shares.
Again mutual funds seem to be the better route.
Let’s now discuss equity and mutual funds from a different perspective keeping in mind the common man’s objective.
Let us be honest as far as possible. Ask yourself the following Yes/No questions:
- Reading balance sheet of the company as a fund manager might do
- Identifying up-coming sectors
- Knowledge about companies, market, economics, and politics as a well-experienced professional fund manager might have
- Identifying the risk elements in an investment
- Predicting the future of the market as per any given scenario
If you have all of the above capabilities, go on and make wealth! In most cases, however, the answers would be “No.” Most of us do not have time to learn all these aspects of investment. Even if we do, we may not be able to do it regularly. Mutual funds are well-equipped with fund managers to do all the above activities.
Let us just concentrate on our jobs and leave our wealth management to the pros.
November 18th, 2008 at 11:39 am
One must invest in mutual funds to diversify the portfolio and to take the advantage of the professional expertise. I would want to know how to select the fund. As you explained that a common man will not be in a position to judge a company by reading the balance sheet.. What are the parameters that should be considered? It should be selected on the basis of past performance?
November 18th, 2008 at 4:25 pm
Basha,
You have shown a path, if followed and investor can actually reap the fruits of diversification, your questionnaire actually made me think am i capable of investing in direct equity.
MF are professionally managed so we can expect a better return as compared to investing directly with less experience and knowledge, as narrated by you even small investors get the opportunity to reap high returns of very expensive stocks through mutual funds. Your effort is educative and impressive.
November 18th, 2008 at 4:35 pm
Writer has shown an investment vehicle which provides equal opportunity for a small scale investor as well as a HNI to get the best returns out of diversification. The last statement says the bottom line our hard earned should be managed by professionals.
November 18th, 2008 at 4:39 pm
Well said “Let us just concentrate on our jobs and leave our wealth management to the pros.” this is what is required to get the best for our investments.
November 19th, 2008 at 7:49 pm
Very well said.. if now we don’t concentrate on our job and leave our wealth management to the professionals… we will also loose our job as well the pros will.. as we will start managing theirs……………. get back to work!!!