Direct Equity Investing vs. Investing in Equity Schemes

Many people prefer investing directly into equity markets by buying shares as against giving the money for mutual funds to invest on their behalf.

This direct equity investing takes the form of
1. Day trading – trying your luck by buying and selling the same day
2. Buying based on non-fundamental factors, news flow, with the hope of selling at a higher price
3. Buying based on a fundamental framework with a meaningful time frame in mind by identifying value in a company (and the business)

The other option investors have is to hand over their money to Equity Mutual Funds, where professional fund managers manage their money for a cost.

Investing directly into equities requires substantial skills sets, time commitment and years of learning. It is specialised function like any other activity of orthopaedic surgeon or a banker or a pilot and hence requires years of learning, time commitment. Though most people investing directly feel that investing is easy, optimal results are not achieved as it is normally not their full time activity or their core competence.

There is also a major risk of people not achieving their financial goals, which they might have set to achieve with their equity investments as they would review their own results with a softer bias as against someone else’s.

On the other hand mutual funds offer a good range of schemes to meet each investor financial objective at a reasonable cost. Fund Managers specialise in this area for years offer enhanced advantages like
a) Access to world class research
b) Access to global information and industry knowledge
c) Advantages of scale of managing money (like low commissions vs. what individuals might pay)

Also, decision making will be less biased than an amateur investor in evaluating investment decisions which have been taken and need urgent correction. Most direct investors find it difficult to get over “emotional constraints” which don’t allow them to take rational buying and selling decisions like selling a stock in a loss etc.

Unless professionally done, personal equity investing has very few chances of being successful. It is full time job, given the rapid changes in global environment, complexity of companies (large and more businesses), market volatility and the cost (time and money) of doing individual investing.

Also the current complex environment which includes factors like the US Housing Market Problems, the European Crises, the Greece Potential Default problems, Euro Disintegration, Hyper Commodity Inflation, makes investing more challenging and only professionals with a strong fundamental support have a better chance of success than individual direct investors.

The cost of being sub-optimal in investing money is a big RISK which many investors carry. There could be significant opportunity loss or capital loss which mostly is never reclaimed.

In addition to professional advantages of investing, the cost of investing in a mutual fund schemes have been reduced recently. Indian equity mutual funds work on zero entry load basis (no money is to be paid for entry into the scheme).

Secondly, the investor pays a management fee for fund management expertise, which is about 1% to 1.25% per annum. Hence the costs are not very high for getting good professional advice.

Investing in an equity mutual fund is like getting a good specialist doctor for treating your problems and directly into equity is like trying to be your own doctor. If you are not good on your own it can lead to undesirable results.

Summary:
1. People investing directly into equity tend to end up with bias in evaluating their performance.
2. The risk of investing directly is not fully understood, given the complexity of market systems and interconnection of global markets by part-time investors.
3. Emotional bias is more likely to come into decision making in your personal portfolio, for eg. majority of people don’t like booking losses in stocks where their decisions have gone wrong and continue to bleed.
4. Individuals also do not gain from scale advantages which equity funds have.
5. Any of above missteps can lead an individual to miss his long-term financials goals which can have serious implications.

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