When it comes to wealth creation than Investing in equities is a much desirable option. The probability of generating higher returns is much more than any other asset class. In fact in the absence of equities in one’s portfolio finding returns good enough to beat inflation and reach your goals will be difficult.
For investing in equities there are two means for investors – Direct equity and Mutual Funds. Mutual funds, as we all know, is the simplest of two and is a viable option for most investors for the benefits it carries. The ease of smaller investments and professional management gives it a priority for advisors and investors. Contrary to this direct equities may have opportunities for higher wealth creation but then it’s not only about investing. To invest in direct equities you need to be knowledeagble on many areas which can work for you.
What is that which you require for investing in direct equities and which we all may not possess –
Lets agree to this point. Direct equity is not as easy as just doing a transaction through your Demat account to buy x number of shares of Y company. It needs a lot of expertise to actually identify a company which can create wealth for you. The time taken to analyze a company is way above your imagination. Analyzing balance sheets, knowing about the management and the company business etc.. are some of the traits which are required to become an expert in identifying stocks. We need to accept the fact that most of us do not possess this expertise and devoting time is not worth it.
2. Managing Risk
Infosys built a fortune for its investors but there are others who destroyed wealth. Similarly, companies like HLL have given good dividend to investors while many companies have been worst company to invest. Now how many of us can really identify what any company can do in the future. No one. Even the best of the fund managers go wrong in stock selection. This uncertainty is the risk for you while investing in stocks. When we say we have a high-risk appetite then we are referring to the risk of our hard earned money going bust. Believe me, if it happens then it takes years to recover from it. We are not Warren Buffet or Rakesh Jhunjhnwala who will be able to wither losses and keep on investing.
3. Diversification Is Not Easy
We all take or give advice that do not lay all your eggs in one basket but diversify them to different baskets. This way if one goes down then there is other to make things good for you. The monthly salary on which our life revolves is not sufficient enough to diversify among stocks. To maintain a diversified portfolio in direct equities you require a high capital which will not be viable for us. Above all its the risk which is difficult to counter.
4. The Time Constraint
Each one of us has a life to live. We have responsibilities, our work schedule and then our family who needs a time from us. Our working schedules are too hectic to devote time to any other task. This is the only reason we are ready to spend a bit more to save time to meet our friends and families. Contrary to this even a company analysis can take up a substantial amount of time. For many this is a full-time job. Meeting with management, analysis of years ofbalance sheets, etc etc.. all work involved need much of your time. How many of us can really spare that time from our work and if we try to do simultaneously you stretch your health too far.
Long term equity investing is all about patience. Markets characteristics is to play up and down. In mutual funds, your portfolio volatility will be high when there will be higher up and down in the equity markets. But when you invest in direct equities then you will witness higher volatility even with smaller movements since you may hold only selected stocks. If you do not have patience then you will get get jittery and a high probability that you will exit seeing the losses in your portfolio. Thus, you need patience to see through different market cycles which may pertain to your stocks.
Direct equities have lot of attraction when media brings out the 100-1000% return stories. We all wish to be part of this wealth creation. But whether we should go there or stay put through mutual funds, probably analyzing yourself on above 5 points may give you an answer.