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”.
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.