Part 5: Process or How the heck do I Invest in Equity Successfully?

5.13 Invest in very few Equity Mutual Funds but Smartly

Why invest in Mutual and Index Funds when you have a stock portfolio? Or vice versa. Which types of funds could add value to your portfolio? How to choose such funds? How to build a portfolio of funds? How to track the performance of funds? When investing lumpsum is there a right time to do so?

The objective of your investment in equity is to earn healthy high returns by taking manageable risks. You cannot avoid risk when investing in Equity but by having reasonable returns expectations you manage it at a level where you stay invested.

You can build your equity portfolio by investing in:

Direct Stocks
Actively Managed Mutual Funds
Index funds or Passive Mutual Funds
ETFs (Exchange Traded Funds)
PMS (Portfolio Management Services)

Mutual Funds and ETFs exist for all asset classes and in any combination– stocks, Debt or Fixed Income, Gold, commodities, currencies and everything else. Since we are primarily interested in long term investing, not short term or trading in equity, we will cover only stock-centric mutual funds.

An equity mutual fund essentially pools money from various investors and the Fund manager invests it a portfolio of stocks. Everything that you have seen about investing in stocks is what a Fund Manager-the person who builds and manages the mutual fund needs to do, albeit using their own methods, process and research.

In contrast Index Funds and ETFs simply replicate the portfolio of the Index and there so, there is no Fund Manager making the decision on what to invest in.

A Fund Manager manages the fund portfolio which are bought and sold as units like any ‘product’. Instead of a price, you invest at the Net Asset Value, NAV of the fund. It is the value per unit of the fund. You can invest in MF with very small amounts unlike PMS which currently requires you to commit a minimum of 50lacs and the fees are much higher.

You can read more about the different types of Mutual Funds in this blog: Types of Mutual Funds

And to know the most important terms in MF investing , refer to this blog: Do you know the ABC of Mutual Funds Investing…

Each way of investing has unique benefits and challenges which you will understand better now that you know how to invest in stocks directly. This is summarized below:

Key benefits of investing in Stocks
Flexibility and Control	Higher control over the portfolio. Can allocate more to a few stocks where investor/advisor has conviction. Decisions not impacted by external factors as in an MF eg large inflows, redemption pressure, fund manager exit, etc.
Lesser Cost	Lower overall cost compared to mutual funds. No fund manager expenses. Lower churn. Can enter and exit without impact cost (adverse impact on price) usually faced when order sizes are large.
Key Challenges
	Risk of capital loss Stock prices are extremely volatile in the short term leading to irrational investor behaviour.

Key benefits of investing in Mutual Funds

Diversification

Mutual funds typically hold 50 stocks in a portfolio thus less risky.
An investor can benefit from multiple investment strategies and themes with ease.
Actively managed by a competent Fund Manager

Small Ticket Size

Investment in a diversified portfolio with a very small amount.
Easy to follow a disciplined way of investing monthly savings.

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