Think Investing in stocks yourself is better than going through mutual funds?

Think again — This D-I-Y may be one of your most expensive mistakes ever!

Is DIY Investing for you? (Source: The Week)

Having taught the basic principles of Financial Planning and wisdom for years now via my college lectures and one-to-one courses, I have met my fair share of people looking to be financially literate. I help people speak the language of their accountants, wealth advisors and fund managers but that doesn’t mean one must necessarily replace them.

Recently, one of the students came up to me and asked me for my blessings on his new career move.

He said he had found his calling and that he was going to be a “stock market trader”. I asked him how he decided on this career path and told me he was “killing it” in the stock market. Since he had started investing (roughly 1.5 years ago), he was generating returns of 70% p.a.!!!!

Need I dare caution him?? Of course. After this little reality check:

For all investors who entered the stock market after the crash of 2020, if you did not generate good returns, you are doing something horribly wrong! Generating profits in a bull market is rarely a feat — in fact, you are as good as any other investor. The real challenge is to be able to keep up this return of 70% for the next 7–10 years.

Then I will cede and admit that this may as well be your calling!

Most people who invest in the stock market as a side hobby DO NOT have the time, skills or the capital to do so. There is a reason the popular AMFI TV commercial, we have all seen during the IPL matches says “mutual funds sahi hai”.

Let me give you an example to explain better:

Imagine when we go to the market with a small amount of ration money looking to buy some fruits for our family. We zero in on some apples and buy two kilos. On biting into the first one, we find a worm and realize that the apples we bought are rotten. There goes all the money!

What if we had the option of buying a fruit basket — with a little apple, some oranges, grapes, maybe a slice of a watermelon, some foreign fruit like mangosteen? And all this at the same price at which we would’ve purchased a dozen apples?!!

Which would you choose? — Buying two kilos of apples or getting the whole fruit basket?

The apple or the fruit basket? (Source: Crushpixel)

OF COURSE, you will pick the fruit basket. I surely would! Not only are you getting a good variety, the fruits have been picked by a Fruitwala who knows his fruit! He does it for a living for most hours in his day, every day!

Putting this into context — A mutual fund is like your fruit basket. Investors pool their money into this giant basket. In return, they get a % share of this basket in the form of units (Smaller fruit baskets). The value of each unit is dictated by a term called NAV (the price of each basket).

Our money is now being invested by someone whose job it is to know the goings-on of the stock market. The Fund manager’s sole purpose is to track the news, politics, economics, socials, fundamentals and technicals of the stock market and make investment decisions. It is his living for most hours of his day, every day!

Still not convinced?

Take a look at index funds that track the performance of the top 30 (Sensex) or 50 (Nifty) companies in the stock market. What do their returns look like? They should be your first benchmark. Do you know why? Because these Funds just do one job — Passively copy the actual index, no brainwork required.

With your effort, you should at least be able to beat them.

And if you are still not convinced and are fancying a hand at the stocks game yourself, then at least go armed with the following pointers:

1. You MUST have time to invest: Not only must you keep up with all the financial press, you must enjoy the process of researching, reading up and regularly tracking your investments.

2. You MUST BE willing to get educated: Investing is beyond just making money from money, it also involves tax planning and minimizing costs. You will have to learn about how your investments are taxed so that you book profits and losses effectively. Dividends are now taxed in the hands of the investor (you!). You will also have to learn about Brokerage, SST, GST and other trading costs ensuring you don’t over-trade.

3. You MUST UNDERSTAND the concept of Opportunity Cost: You are obviously sacrificing some time from whatever business or day job you have, to start investing on your own, the time you are spending doing this is being taken away from something else you could have been doing. Is it really worth it? Do that math before you take the plunge.

What is your risk appetite? (Source: Aditya Birla capital)

4. You MUST Identify your risk appetite and stick to it: When we see an investment making money, we are tempted to go all in. We have all heard this tune on TV “stock market investments are subject to market risk” they don’t just say this because they have to warn us (legally!) but also because we must identify our risk-taking capacity and adhere to it.

5. You MUST NOT get emotionally attached to your investments: Most of us find it hard to cut our losses and move on. People when investing their hard-earned money themselves cannot book losses and exit when a stock has fallen way below expectations. They wait and wait and pray and pray. One must consciously not fall prey to fear, greed, overconfidence and a God complex. This is not only eroding your wealth; it is also costing you precious compounding elsewhere.

My final word:

If you are hell bent on DIY, try maybe doing both? Give some of your wealth to the experts (Afterall what harm can it do?), DIY some of it, put some in negatively correlated instruments like GOLD (Sovereign Gold Bonds are a good way to go about it) and keep a portion of it in a guaranteed return type investment (FDs, liquid funds) — Hoping you still have some good fruits in your basket when the markets don’t cooperate.

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