An equity MF provides the advantage of diversification, wherein the investor’s money is spread across various sectors and stocks
Equity investing – Can I do it on my own?
In our experience of dealing with individual investors who manage equity assets on their own, from time to time resort to buying stocks as recommended by their “well connected friends”. In the process, over a period of time, they end up owning a large number of stocks and yet just three or four stocks accounting for over 50% or 60% of the total value. They also know little about the fundamentals and mostly end up selling stocks that rise sharply.
So, are individual investors geared enough with the required time, knowledge and psyche to take up equity investing on their own?
Mutual funds (MFs)are a great tool to invest in equities for individual investors who wish to start investing even with a small amount of Rs 5,000. An equity MF provides the advantage of diversification, wherein the investor’s money is spread across various sectors and stocks.Such funds offer easy participation in markets.
Actively-managed equity funds in India have achieved a significant size in last few years accounting for over Rs 5 lakh crore as on June 2017. When it comes to wealth creation, active equity funds have done exceeding well over the past many years.
Equity funds are broadly classified as large-cap, mid-cap, small-cap or multi-cap funds based on the size of the companies. Often, these types of funds are pitched to investors as per their varying risk-return profiles. Balanced funds have become increasingly popular due to their lower-risk profile vis-à-vis pure equity funds. Equity linked savings schemes (ELSS) are great for saving in equities while also saving taxes. Dividends declared by equity MFs are fully exempt from tax.
On the other hand, if investing directly into equity markets, even a simple corporate action like issue of bonus shares can have a large tax implication as the bonus shares issued are valued at zero for tax computation.
There is no particular success formula for wealth creation in equity investing. To construct a portfolio of stocks that meet pre-designed filters, the fund manager essentially has to choose from the good, the bad and the ugly. During the portfolio construction process, a fund manager often has to make a trade-off decision between the three factors of quality, growth and value.
To make such decisions, one has to have a high level of understanding of the underlying business including the industry in which it operates and needs to be in continuous touch with the management of the company. Ultimately, stock prices are slaves of earnings of the company in the long term and hence, needs to be watched out quarter after quarter along with an outlook for future earnings. As a result, investment research and fund management cannot be the job of a single person.
The standard disclaimer at the end of most of the cola ads that go, “Do not try this at home. These actions are performed by trained professionals”. These words stand apt for equity investing too.
The writer is senior vice president and head - products & marketing, HDFC Asset Management Co Ltd.
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