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To Be Or Not To Be? Dilemma In Choosing Between Equity Mutual Funds and Stocks

Author: Balaji Rao/Wednesday, July 4, 2018/Categories: Financial Planning, Expert View

To Be Or Not To Be? Dilemma In Choosing Between Equity Mutual Funds and Stocks

The famous bard Shakespeare wrote in one of his famous plays, “To be, or not to be”. Investing in equity markets has a similar dilemma; for wealth creation should one buy stocks or invest through equity mutual funds.

Investing in stocks gives unbelievable possibility of returns; the annual growth rate of individual stocks has shocked even the most patient investors. Stocks such as Wipro, Infosys, MRF, L&T, Maruti, TCS, HDFC Bank, Reliance among several other hundred companies have dispelled the myth of long term because to book profits there is no such term as long term in the real sense.

Imagine investing Rs 9,500 during the IPO of Infosys in February 1993. Who would have thought that in 25 years the investment would be worth over Rs.5 crore! Same with companies like ACC, HUL, ITC, Cipla, Bajaj Auto, Hero Motors and not to forget companies such as Asian Paints, Havells, Page Industries, Bosch, Eicher Motors, Crisil and the likes in the large, mid and small cap space. There are other innumerable stocks too that have created and continue to create huge wealth, but again what RoI is worth and how long to wait continues to haunt any investor.

On the contrary, if we set our annual returns at the rate of 12 per cent to 15 per cent over a period of 20 years would that be a bad benchmark? If an amount of Rs 6600 per month is invested as SIP or Rs 6 lakhs invested as lump sum in equity mutual funds and it generates 15 per cent CAGR over 20 years the value can become Rs 1 crore which isn’t bad at all. But to be able to generate the same wealth buying stocks we will have to ask ourselves plenty of questions such as which stocks to buy, how many to buy, at what price to buy and sell etc. can become daunting.

Instead, if five equity mutual fund themes such as 15 per cent in large cap, 15 per cent in balanced, 30 per cent in multi-cap, 25 per cent in mid-cap and 15 per cent in small & mid-cap from different fund houses are chosen and stay invested for 20 years there are more chances of achieving 15 per cent CAGR in 20 years.

Let’s see a few examples: The old warhorse Franklin India Bluechip Fund (large cap), most consistent HDFC Balanced Fund (hybrid), amazing multi-cap performers HDFC Equity Fund or Aditya Birla SL Equity Fund, trusted mid-cap performer Franklin India Prima Fund and aggressively managed DSP BR Micro Cap Fund (now the name is changed) are chosen and stay invested for 20 years without doing anything. The chosen funds are from the best fund houses managed by reliable fund managers.

If these themes/schemes collectively generates 12 per cent to 15 per cent over the future years creating wealth becomes more pronounced. Investing in mutual funds offers a clear path of return on investment unlike investing directly in stocks which puts us into a huge confusion on returns. The prudence is in generating practical returns with minimum hassles over long term.

The author has written 6 books on investing and personal finance. He has 23 years of experience and 6 years in academics

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Balaji Rao
Balaji  Rao

Balaji Rao

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1 comments on article "To Be Or Not To Be? Dilemma In Choosing Between Equity Mutual Funds and Stocks"

Charudatta Dedhe

7/4/2018 9:41 PM

Good input but not in agreement 100% because no one knew in 93 what Infosys is today, no one imagined an undergarment company share will trade at 28,000/-. So stock selection is an art where 90% failed, 9% never told the truth and only 1% are successful. Even for MF you have taken names which are only successful.

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