Many investors get into the stock market with the hopes of 2x, 5x or even 10x returns in a very short time. They bet on companies without knowing the basics of either fundamental or technical analysis (Read this if you don't know the difference between the two). Many don’t even know what a balance sheet or cash flow statement is but they say, “I have invested in this company because it is a great company that will grow 10x in the next 10 years” and many others have never even seen a chart and put all their money in dubious stocks that their “trusted friend” or an analyst on tv has recommended. And no matter how much you try to convince them, they will not put any time in learning either technical or fundamental analysis. For them, stock market is a gamble, and if they lose money in a stock, it’s not because of their lack of knowledge but because it was just a bad day.
For many investors, it isn’t this bad. They have learned the basics of fundamental analysis or technical analysis, they know basic chart reading, they spend their days watching stock analysis videos on youtube, they follow financial influencers on twitter, and they may even glance through an annual report or two. The result is they know something about everything, but not enough about anything. They end up buying stock after stock, or they put in all their money in the only company whose annual report they read. They may end up making some profit in one but lose in many others. In conclusion, they do not make enough for the time they spend in the stock market. It could be said that their return on investment - their time - is very poor. They could have spent that time at their jobs or starting something of their own and they would have better luck.
Most retail investors are unsuccessful for the very same reasons. If you are a retail investor, your chances of failing far surpass your chances of succeeding, by a very high margin. They make a lot of risky moves in the stock market without much concrete analysis to back them up, leading to poor returns along with the burden of high commissions and taxes they pay on their transactions. The end result is that very few retail investor are able to even reach the average market return which they could have made easily with index funds (Read this to understand why index funds can be the best thing to start with), let alone surpass it. It is hence advisable that unless you are able to devote considerable time to learning about the market and the companies on the market so much so that can actually teach others about it, being an individual stock picker may not be for you.
Then how do you invest, you may think… Well, the answer is in the title of this article.
Let me give you 13 reasons why you should stick to mutual funds unless you wish to make investing or trading a full-time profession, or atleast a second job.
Mutual funds give returns you rarely get by individual stock picking. Even if you invest only in index funds, you will get good enough returns. For example, the S&P 500 index has historically given 11.88% returns while the Nifty 50 index of India has given around 13% returns. This is much more than what retail investors make in the long term by individual stock picking. Better yet, if you choose active funds, you have the possibility of higher returns. Of course, you should analyze the active funds before investing. (Quick guide on how to analyze active mutual funds here)
Mutual funds take away many challenges of individual stock picking. You don’t have to read annual reports, learn about company management, check the products, and do hundreds of other analyses seasoned analysts do. This saves you a lot of time that you can actually invest in your job, hobby, family, or passion.
Mutual funds are easy to choose and diversification is easy. There are equity funds and debt funds, each focusing on different segments. If you wish to have low risk, moderate returns, you may invest in bluechip large cap funds. If you want exposure to growing companies, you can also invest in midcap and small cap funds that majorly invest in smaller companies. There are also flexi-cap and multi-cap funds investing in all segments. Some funds are sectoral, focusing only on specific sectors, say pharma, IT, etc. Diversification is easy. You can invest in equity and debt funds separately or choose hybrid funds if you want exposure to both.
You don’t have to choose 30 funds, like you need 30 stocks. Even 3-5 good funds diversified across segments and asset classes would be enough.
Mutual funds can also help in tax-saving. You can choose one of many ELSS funds to save on taxes.
If you invest in direct mutual funds, the expense ratio is low. This saves you a lot of expense you would otherwise face while buying and selling stocks.
You will have much lesser churn if you invest in mutual funds. Because you don’t see your mutual funds daily, you won’t face the emotional reactions you normally have when you see your stock portfolio. You won’t sell your mutual funds on a whim and hence it is easier to keep your investments locked in for the long term and let the magic of compounding work.
It is much easier to invest regularly in mutual funds through SIPs thus helping you put a desired amount in investments every month. You can set-up automatic withdrawals from your bank and automate your investments.
You wouldn’t invest in dubious companies based on tips since the fund houses will decide your portfolio and not you. This way, you save yourself from potential blowups.
Most importantly, you don’t see your mutual fund investments as frequently as you do for your stock portfolio. So, there are lesser chances of reacting to the volatility of the market. You don’t get very greedy nor do you get fearful helping you be patient, which is generally the biggest quality lacking in stock pickers. Mutual fund investing is boring, if you think about it. And boring always works.
Bottom Line:
Unless you are ready to devote considerable time in learning either fundamental or technical analysis, and you are actually interested and passionate about investing, it is prudent for retail investors to choose mutual funds instead.
They are easy to choose, inexpensive, lets you control your own emotions, and also save you time. Since you also have the option of index funds, you can buy them literally in the next hour after reading this article, thus helping you start your investing journey.
This is not a recommendation against individual stock picking. If you are truly interested, you MUST learn fundamental or technical analysis, and pick good companies. You don't need 100 great stock picks to change your life. One or two good choices are enough. But don’t dive into it without learning about it. If you do, it would be no better than a gamble and when has gambling been in anyone's favour?
Comments