Deciding Between Stocks and Equity Funds for Long-Term Investments: By Sidhavelayutham, Founder and CEO, Alice Blue

Sidhavelayutham, Founder and CEO, Alice Blue

Chennai (Tamil Nadu) [India], June 24: Many new and part-time investors are torn between investing directly in stocks and investing via equity funds. Novice market participants often want to make large profits and generate supernormal returns by investing directly in individual equities. Amateur investors, on the other hand, may be confident in their abilities to discover equities and hold them for the long term. While it is true that individual long-term investors may amass large wealth, other considerations must also be considered. 

Rakesh Jhunjhunwala, known as the “Warren Buffett of India,” is one such example. Beginning with a paltry Rs. 5000 in capital in 1985, he amassed a net worth of over Rs. 45,000 crore via stock transactions. This accomplishment is undeniably astounding; especially given the amount of time, work, and money he devoted to acquire such a wealth. However, owing to their current occupations or enterprises, the majority of people in our nation find it difficult to replicate that degree of devotion. This is one of the reasons why Systematic Investment Plan (SIP) monthly inflows into equities mutual funds have achieved all-time highs, such as Rs. 14,749 crore in May 2023 vs Rs. 14,276 crore in March 2023.

Direct stock investing may be a complicated game, but if you have the risk willingness to accept losses, the financial acumen to interpret statements, and the patience to keep shares for the long term, it may be a feasible alternative for you. If, on the other hand, you have a normal 9-to-5 work or other business obligations that prohibit you from devoting time to understanding the stock market, it is best to delegate responsibility for your equity investment to professionals. Professional fund managers have decades of expertise managing enormous quantities of money for clients.

Aside from expert management, investment in equities mutual funds offers risk diversification. Whether you select a large-cap, mid-cap, or small-cap fund, it will normally consist of a diverse portfolio of at least 25 companies from different sectors, in accordance with fund management regulatory regulations. The Franklin India Smaller Companies Fund, for example, consists of 78 equities with varied weightages allocated to each company, a sector-based distribution, and a stronger concentration in small-cap firms, as the name suggests. Furthermore, fund managers analyse the firms within the fund on a regular basis based on quarterly results, management conference calls, and sector updates. This kind of oversight is difficult for individual investors who may have other professional obligations.

Finally, many individual investors fail to sustain conviction when it comes to stock holdings. When the value of a company falls by 40% from its purchase price, investors prefer to cling on to it and wait for a complete recovery. In contrast, if the stock increases by 10%, they often sell it fast, feeling like winners. This typical conviction error includes selling victories too soon and hanging on to losers too long. Finally, whether you invest in individual stocks or mutual funds, “time in the market” with the appropriate selection of stocks or funds is much more essential than attempting to timing the market.

As a result, selecting the best investing strategy needs considerable study. If your investing perspective is long-term, your available wealth is restricted, and you lack the time and experience to comprehend the market, you should invest without hesitation in an equity mutual fund. However, if you have the expertise to research stocks for long-term investment, examine them on a regular basis, and practise patience, you have the potential to become a successful investor. The decision is ultimately yours.

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