You don’t need to be investing in stocks if you can focus only on mutual funds provided you can avoid the following temptations to investing in stocks.
Jay asked in Ask me anything (AMA)
Returns from mutual funds over the past few decades are quite good and if I just want to invest in equity and focus only on mutual funds, I don’t see a reason to be investing in stocks. So can you please tell me why do I need stocks. Actually I am not able to find a single reason to be investing in stocks and so I am tempted to ask you about it. If you just skip this question I am fine with it as well because I think the question actually questions the need of your blog as a whole.
Thanks for asking such an interesting question. The short answer to it is no, you don’t need to be investing in stocks if you can only focus on investing in mutual funds but then there are many reasons why you will tempted to be investing in stocks when you can do it all with mutual funds.
Here are few reasons why you will be tempted to stocks when you want to be focusing only on mutual funds.
1. Beat mutual fund returns
Once you start to see handsome returns in mutual funds, you will be overwhelmed with information from various sources (tele callers, searching on internet) on how you can better those returns by investing in stocks over mutual funds and soon you will be tempted to stocks.
The temptation may not just stop at stocks and you can be attracted towards commodities, forex, futures, options where you will be able to trade for lot more than what you invest.
I am yet to invest in futures and options. On top of that, I don’t use call and put options data or open interest to predict price movement. I am just not willing to learn those and keep myself out of it.
If you can do it with all mutual funds without getting into stocks, it is the best choice.
2. Stock tips
Stock recommendations will soon be coming your way and you will soon see stock tips that can help you make lot more money than mutual funds and you will feel about being missed out. Even if you verify those stock tips, in the back of your mind, you are eagerly waiting to see one tip that just sky rocket to get you started in stocks.
Actually those stock tips never works because many times you should have got those tips a few hours earlier than you actually got to make anything out of it but being a newbie in stocks, you will not realize such things when getting started.
3. Brokerage and margin money
Once you have a growing portfolio in mutual funds, you will be offered a free trading and brokerage account. Once you have a brokerage account, you will be offered margin money to trade in the market.
Who does not like free money to trade and make a profit out of it?
Margins are killer for investors but then it is bread and butter for your broker to generate more brokerage. Soon you will be trading in stocks and as you accumulate losses, you may just want to be a long term investor in those stocks.
How I am also confined to?
Actually there is no need to be investing in stocks but there is an asterisk in the above statement which is you need to be very strict and to an extent rigid about it. I have been confined to trade only in the cash segment and not in futures, options or commodities.
The temptation to trade in futures and options is so high that with one click I can get started and that too without paying anything and just moving my investment from DP to margin (just few more clicks) but then I am not willing to just make that click(s).
Being a blogger and having an AMA where I can be asked almost anything, I get many queries about using RSI, MACD and many other chart patterns.
Initially when I started to get those questions, I thought I need to be knowing them.
I read about those patterns but then I just could not use those patterns in the market because my price action patterns like lower top lower bottom, W formation and a break out pattern just works almost perfect for me. So now my answer to such question is always “I don’t use them and so will not be able to help you much about those patterns”.
Final Thoughts
The secret mantra to keep yourself confined to few things in market is to go deep with whatever you are doing and not wide to try too many things.
If you can do it with all mutual funds it is always the right choice for you. Be convinced that mutual funds are working for you and how you can work on better your investment only with mutual funds.
If you can do it only with investing in cash based equity market, it is the best thing that can happen for you.
If you are tempted to be doing something different, try to learn the way it should be done before just diving into it and putting your hard earned money in it.
If things work out for you in futures or options or commodities and you know what you are doing and want to be doing it that way only, it is the best thing that can happen to you.
Do what works and keep doing it instead of trying too many things.
Last but not the least this blog is not about stocks and it is about educating and mentoring fellow Indian retail investors investing in market.
Wherever we want to invest, we first need to have knowledge and track record of those. This will always help if discussion made in forum.
i am investing in mutual funds since 2008 and lost in some mutual funds also. Not all mutual funds deliver. Mutual funds like JM basic which were top then are no where now. Also top 10 mutual funds change every time. So a top fund this year may not be top next year or next 5 years. My view is if you time and inclination to study then invest in good stocks also. If you monitors regularly , you can get good returns.
@milindshripad:disqus You have to keep shuffling the non performing fund after knowing the reason for non performance.
So yes mutual funds are slightly better than stocks but then you have to go deep into managing your mutual funds and not just invest and forget kind of scenario.
I agree with your points. However, I would also like to add if your are
investing in stocks you are the owner of the stock that is if the prices
in future increases you can take self decision to keep that stock and
benefit from the various offers the company provide it to its
shareholder, which i fear is not the feature of mutual funds (Correct me
if am wrong).
I don’t think minority share holders have too much to say in board decision about the company.
Hello Shabbir,
Just read your article on why Stock ?
There is one more thing, MF gives you diversification wherein stock don’t. A lay man can start of SIP of just 1000 PM can enjoy the fruits of diversification which when it comes investing in stocks. Please share your views.
Best Regards,
Gautam
Yes Gautam, I agree with your views about SIP in mutual funds but then you can also do the same with stocks but then amount may not be very strict of 1000. Rest may be all same.
This has been the case with me where I started with mutual funds and then made huge loss in FnO. Thanks for your guidance Shabbir and I am recovering my losses.
Glad I was able to be of help to you in recover your losses.