In the current scenario, when debt yields are at all-time lows, the real challenge is how to create wealth in the long run. The one choice that investors have to gravitate towards is equity. That brings us to the second choice. Should an investor approach equity investing as direct equities or via equity mutual funds? Let us look at the idea of investing in direct equities first.
The case for investing in direct equities
- Direct equities work best when you are looking at multi-baggers over the long term. Typically, investors should use direct equities where they have an understanding and expertise in the specific sector. A simple example. If an investor is an engineer in the steel industry, he surely understands steel industry dynamics much better than others. Start off with steel stocks.
- If you are a short term trader with the appetite and the intent to churn money, then direct equities are a natural choice. You obviously cannot trade in mutual fund units which are a cluster of assets and hence very hard to predict. It is only in direct equity that you can use a mix of charts, trends and news flows topped with fundamentals to enter and exit stocks.
- Where you want to play a big futuristic trend, equities offer a better choice. Take two cases. The first is electrical vehicles and the second is green energy. Today, you don’t have dedicated mutual funds on these themes. Same is the case with digital. Many of the digital funds are not exactly digital funds, but an extension of an IT fund. In such cases, a very focused equity portfolio can pinpoint opportunity.
- Direct equities can add value if you have the time, expertise and bandwidth to nurture an equity portfolio. In such cases, equities can really outperform mutual funds. Take the example of TCS. Between its listing in 2004 and today, the market cap of the stock has moved from $6.15 billion to $200 billion. That is a CAGR return of 22.75% annually over last 17 years. It is hard to get an equity fund that has given that kind of returns.
- Rely on direct equities, if you are really chasing multi-baggers. In India, there have been many stocks like Eicher, Avanti Feeds, Symphony and Havells that have all been hundred-baggers over a longer holding period. You must have surely heard of how an investment of Rs.10,000 in Wipro in 1981 would be above Rs.1,000 crore today. These are the kind of incredible returns; you only get in equities.
The case for investing in equity mutual funds
- Mutual funds are managed by experts with much greater access to information, insights and best in class research. This makes them much more informed investors and this benefit is passed on to the investors for a nominal cost.
- Mutual funds offer a wide choice. For example, you have a choice of diversified funds, mid cap funds, multi-cap funds, sectoral funds, value funds and the list can go on. The bottom line is that there is a much wider choice for the investors to take a pick from and they can fit these funds to their unique needs.
- One of the most important arguments in favour of mutual funds is that they naturally fit into your financial plan. We all have long term goals like retirement, education of our children, creating a nest egg, leisure travel etc. All these have to be planned and they require money. The best way is to make your money work harder through mutual funds. The experience has been that mutual funds are the best way to peg your existing resources to long term goals.
- A very important aspect of mutual funds is that they are flexible. For example, you can tweak your equity/debt mix, you can tweak your sectoral mix, you can tweak your capitalization mix. All this is possible only because there are a wide variety of funds to choose from.
- Finally, mutual funds give a choice of alternate assets like passive funds, ETFs, gold, international assets, long duration debt etc. The experience of the last 20 years has been that at different points of time; equities, bonds, gold and international assets have done well. A diversified mutual fund portfolio incorporating all these asset stacks can be the best answer to risk.
Summing it all up
In a way, direct equity and mutual funds are not discrete choices of 1/0. They are normally complementary. For retail investors, the guiding principle is that mutual funds should still drive their long term goals and their financial plan. However, alpha or extra returns to add bonus points to your portfolio, can come from direct equities.
The author of this article is Mr. Sandeep Bhardwaj, CEO, IIFL Securities