A recent email from a reader asking which company’s shares he should invest in has prompted this primer on equity investing. It was a reasonable enquiry and one which a lot of advisors would doubtless be happy to opine on. However, we are not a lot of advisors and our usual response to such a query is: stay away from direct equity.
The issues are process, research and reward, so let’s take a closer look.
Firstly, process: buying and selling shares requires one to have a brokerage and a demat account. Today, these are freely available via online platforms offered by most large banks and other providers and these have almost completely replaced the traditional broker. A lot of brokers have, in fact, stopped dealing with individuals’ transactions as it is just too much headache for them and the brokerage rewards are too low to warrant the headache. Trading online is quite easy subject to the huge caveat that you definitely need to have a degree of comfort in dealing with technology – and that, unfortunately, is lacking in a large percentage of the investing public. Investing and disinvesting in mutual funds, on the other hand, requires you to have a bank account and a pen. Much simpler.
On a more important note, determining which companies to invest in; doing the research; monitoring them to ensure that they are delivering on their promise; keeping track of market and sectoral trends; understanding how government policies and macro economic factors are going to impact the companies you’ve chosen; deciding how much to allocate to which company and when (or if) to exit – these are all decidedly complex matters and best left to the experts. The stock market is much more complex and interconnected and susceptible to market forces beyond most people’s control than it was a couple of decades ago and investing in it with a reasonable expectation of making a decent return is no longer a matter of ‘tips’ and hearsay. It requires strong analysis and a strong stomach and a deep pocket to ride out occasional troughs and dips.
Even what constitutes a blue chip has undergone considerable change over time and there are no guarantees that a blue chip is going to retain its particular hue of indigo and it’s just as difficult to predict which pale blue one is going to turn a deeper shade or when. A favourite example (though with reference to the international markets) is the cellphone example. Less than ten years ago, if you wanted to invest in the undoubtedly booming and potentially underserved cellphone industry you might have chosen the market leading ‘blue chips’ of handheld phones: Nokia, Motorola, Blackberry and perhaps Ericsson. And your portfolio would have died like a cellphone’s battery. Apple and Samsung, which today control 85% of the market were not even a gleam in any industry pundit’s eye at the time. And today we have the likes of Xiaomi and other unpronounceable Chinese manufacturers nipping at their heels. Closer to home, Hindustan Unilever is undoubtedly one of the bluest of blue chips. And yet, even its shares languished practically immobile for a good five years until international circumstances re-awoke interest in the scrip.
A second and no less important point is the amount you have available to invest which directly impacts reward. Buying individual scrips requires you to buy at least a single share. And building a decent portfolio without fragmenting it into meaningless shards requires investing healthy amounts in individual scrips. If you have a lakh to invest and you spread it across 10 scrips (that’s ten thousand rupees each), the chances that all of them will deliver significant gains is remote: some may make 50%, others may make 5% and some may even lose value. So, by fragmenting you reduce your chances of significant gains.
A mutual fund investment solves both these problems – research and reward – in a single stroke.
Parking that one lakh in a mutual fund blue chip scheme allows you to participate in the fortunes of a bunch of companies – more than you could afford singly. These are chosen by experts after a deal of research, constantly monitored by them and disinvested from and reinvested in based on their perceptions of the companies’ value and the market forecast. Sure, the experts are human and fallible too, but they have access to a lot more information, expertise and experience than you do, so the chance of them getting it right is brighter than yours.
And if they get it even partially right, the scheme NAV rises and you make money on your portfolio: even a meagre 10% rise in NAV is ten thousand added to your one lakh portfolio and the chances of making 10% on a single investment is higher than making it on a fragmented portfolio.
Additionally, the mutual fund route allows you to dip into different sectors (blue chip, mid cap, infrastructure, etc.) with smaller amounts of money and more ease than if you were to try to do the same thing on your own by buying individual scrips.
Eschew the direct route, embrace the mutual one.