EQUITY MUTUAL FUNDS &
DIRECT EQUITY
- Where is the difference?
Agenda
• Investment & speculation- the difference-
• Equity mutual funds & direct equity
• Qualities needed for a successful investment
• Why people prefer direct investments?
• Why equities through mutual funds?
• Threats of mutual funds
Investment & speculation:
• Speculation & investment are 2 very distinct terms.
Speculation:
“Taking large risks, (especially with respect to trying to predict the future) in the hopes of making quick,
large gains.
- Day-trading, gambling etc. are the examples of speculation where the returns are based on the probability of
occurrence/non-occurrence of any event.
“Speculation is not an investment.”
Direct equities and speculation?
• When a person speculates in direct equity his intention is to take advantage from any windfall that may take place because of momentum movements in market psychology &
sentiments.
• A ‘buy & hold’ investor when he invests in an script has a belief in the company & he intends to participate in the profits of the company. He makes all the efforts to know the company - fundamentally & technically.
• Direct equities may prove to be a good investment avenue in the long-term investment horizon but quite often they are interrupted by factors such as whims, fancies &
sentiments. Moreover, the risk-return range in direct equities is a very large one. These all factors make direct equities more of a speculation & less of an investment.
“Mutual funds are not made for speculators.”
Qualities needed for a successful investment –
Qualities Description Do
you have ?
Does a mutual fund have it?
Investment process A systematic method of selection of the scripts, with the synchronization of objective.
Yes
Infrastructure Technology, information at hand, statistical
tools, research team, time etc. Yes
Experience The experience of making investment
decisions on a regular basis & experience of standing all the business/economy cycles.
Yes
Qualities Description Do you have ?
Does a mutual fund have it?
Knowledge &
qualification Most Fund managers are professionally qualified. Moreover, their knowledge is assisted by a lot many support which they get in the form of their research team, study etc.
Yes
Constant monitoring Reviewing & analyzing your investment at
every moment of time . Yes
Qualities needed for a successful investment ..contd
Qualities Description Do you have ?
Does a mutual fund have it?
Full Time
Involvement Managing your investments is the full-time job of the fund managers. But for you it is the
management of your savings generated from other full-time job.
Yes
Bias Favoritisms for a particular group/
company/sector etc.
Temptations to wait & watch for market to further go down & then enter the market – missed opportunities
Temptations to wait & watch for markets to further move up & then exit – missed
opportunities
No
Qualities needed for a successful investment ..contd
Why people prefer direct investments ?
• The sense of thrill & ego boosting
A sense of achievement is generated when you enter a particular script at /near its lowest.
• Lack of proper understanding of mutual funds & less adaptability to new investment avenues
You are not clear about the mutual funds , its investment process &
working..
• Comparison of individual stock vs. overall portfolio
You are happy when you make some money in some scripts. But, you fail to evaluate the overall return from the portfolio. In an attempt to track some scripts (of which you are hopeful), you overlook the others,
reducing the overall returns on the portfolio.
• Regular tracking of portfolio :
You are an active investor & therefore you claim to track your portfolio very regularly.
But, do you track all the constituents of the portfolio all the times?
• Happy buying , forget selling
You have the happy habit of entering the market at the best bargain .
But ,then you fail to time the sale. You turn out to be an investor with a pile of stocks the value of which even you are not sure of.
• I am just a small player
You constant claim that you invests only a small portion of your total investments in equity,
But then that 5-10% of your portfolio take 90-95% of time , how
Some beliefs/claims of direct investors:
Why equities through mutual funds?
• Most qualities for successful investment making are present with a mutual fund. The qualities which an investment team of a mutual fund possess are much more reliable than the next door unqualified broker.
• It is much easier to analyze and find out a good mutual fund rather than
finding a good stock. The parameters to judge a good mutual fund are the past proven facts rather than on some probable- uncertain future facts.
• It is much easier to track a mutual fund investment rather than an investment in stock.
• The risk control mechanism on your investment are actively taken care of by the fund managers.
• You can be free of all tensions & worry after handling your money to fund managers. Like stock , you need not track it very wildly. You save a lot of time & energy to focus on your competence business, thereby earn & invest more & more.
• You can easily satisfy your long-term objective of wealth maximization.
• All above, mutual funds are the best representations of the minority shareholders.
Performance history of a few funds (CAGR as on 26/07/02)
1 yr 3 yr 5 yr
Pioner Prima Fund 75.22
% 14.48% 21.83
% Reliance Growth fund 56.00
% 10.77% 17.67
%
Zurich Top 200 21.87
% -1.72% 8.89%
Birla Advantage 13.89
% 0.43% 18.69
%
Zurich equity 10.22
% 11.41% 24.62
%
BSE 200 10.05
% -7.15% -1.94%
NSE 500 6.25% -7.31% -1.37%
Nifty -6.18% -8.72% -2.57%
• “Mutual funds are not for direct investors who believe that they can beat the market.”
(3 trn $ inflow)
• Investors often tend to study the absolute returns of the mutual funds , which is absolutely wrong.
• They also tend to compare the mutual fund returns with the returns of a single script rather than the entire portfolio of theirs which is again a wrong comparison.
• Today, mutual funds provide a variety of schemes to the different
objective of investors. An investor who aims to perform as the market can go for Index funds (of course, he cannot maintain such
diversification individually).
Threats of mutual funds investments
• Credibility of fund managers:
Structurally, the mutual funds are set up as a Trust in the best interest of the unit holders.
The only area of the concern is the fund manager’s genuineness.
• Corporate Governance of the Fund house , I.e. the pedigree of the fund house- its history & origin.
• Fund management team:
The investment decisions should not be made single handedly by a fund manager. There should be a fund management team (supported by
proper research team) which should collectively analyze the decisions.
This helps to eliminate all the disadvantages(such as bias , sentiments etc.) a single investor suffers while investing
• Investment process-
Different fund houses may have different investment
process. But , the most important point from the view point of the investor is that
- the process should not deviate from the investment objective.
- the process should not be a haphazard one yielding to the fancies of the fund manager.
- the fund management team should be clear about its process and strictly follow the criteria for selecting the
scripts from its defined universe
