Look before you leap!
The onset of COVID-19 and the subsequent lockdowns have been like a dream for many stockbroking firms. There has been a substantial rise in the number of new Demat accounts. It is estimated that Indian investors have opened a record 1.42 crore new Demat accounts in FY21, nearly three times the figure of the previous fiscal year.
Although, it is good that citizens are showing confidence in the capital market in comparison to physical assets such as real estate & gold; nonetheless, inflows in MF investments have slowed down. This is probably indicating that some of the investors are moving towards investing directly in stocks, rather than investing via mutual funds.
Investing in stock carries its own ups & downs; therefore, they should evaluate how they wish to take exposure to their equity investments either through direct stocks or equity dedicated mutual funds. You should consider the following points before making any switch.
Benchmark your performance
When you invest in equity-dedicated mutual funds, it is a benchmark to an appropriate index and also, there are peers with whom you can compare returns. However, when you are directly investing in stocks, it is advised that you select a proper benchmarking of your portfolio of stocks against the relevant index along with mutual funds category returns. This will help you to understand how your portfolio of stocks is performing.
Diversify your investment
Diversification is the only free lunch considered in finance and this diversification should not be just across sectors & stocks but also, in terms of market capitalisation. Hence, when you are investing in stocks, you need to ensure that you are diversifying adequately across sectors and market capitalisation. Proper weightage should be given to stocks & sectors as per your risk appetite. Hence, while investing in direct stocks, you need to ensure proper risk management practices.
Right asset allocation
Further, when you are considering investing in direct stocks, do not forget the basics, i.e. allocating your investments to different assets. While investing in mutual funds, you have hybrid funds that take care of asset allocation. Also, you can invest in equity & debt mutual funds to have a proper asset allocation as re-balancing is also quite easy. Hence, even while dealing with direct stocks, ensure maintaining the asset allocation as per your risk appetite.
Directly investing in stocks demands active management whereas, in the case of mutual funds, the fund management team takes care of all these things. Further, actively monitoring your direct stocks portfolio requires a considerable amount of time for researching the company by avoiding the use of simple tools such as past performance of the stock. While doing so, you also need to manage your behavioural bias and thus, take decisions rationally and not emotionally.