Is it still worth investing in mutual funds?
Mutual funds need to watch out! Too many investors are turning against them. The typical comments received over the past couple of months in my sessions are…
* Mutual funds have high fees and one can easily replicate the portfolio
Mutual funds are boring and don’t make enough returns or cannot beat investing in direct stocks
* Stocks give quicker returns than funds
* There are so many stock investing videos and tips available but choosing a fund is very difficult
In every bull market, investors get overconfident about their ability to trade successfully due to quick gains being made. Replicating fund holdings is easy, but figuring out an exit is not.
Many investors are of the opinion that fund managers don’t add much value, and with low-cost broking platforms and the plethora of information available on the internet, one is better off constructing a stock portfolio. This may work, but most investors don’t really have the ability to analyse or have the time and resources to research companies. With limited capital, it is not possible to diversify and unlike mutual funds, investors do not have limits on stock and sector exposures. Further, institutions have a stock exit strategy, but individual investors rarely have a rebalancing plan. This is why retail investors are left holding overhyped stocks such as DHFL and Suzlon even though institutions have exited.
I constantly hear investors lament about the high fees in mutual funds and often wonder why they don’t assess the costs of investing in international stocks, insurance policies and other investments. With the currency exchange margin, the cost of buying an international stock is 3-5%. Yet, investors continue to flock to platforms providing access to overseas stocks. The media scrutiny on mutual fund fees has got investors’ attention, but they tend to disregard higher in-built costs in other instruments.
Stocks may give quicker returns, but how many such stocks can be identified by a lay investor on a regular basis? And is the allocation to these stocks big enough to make an impact on portfolio returns? People tend to invest in trending stocks and that, too, after they have rallied 20-30%. Nithin Kamath of Zerodha recently mentioned that less than 1% of traders beat fixed deposit returns over a three-year period. Not to forget the taxes that need to be paid for every transaction.
Comparing the right returns is also important. Investors compare long-term returns on mutual funds with short-term stock returns or a stock with a balanced fund. There have been periods of underperformance, but by and large the majority of mutual fund returns have been in line with or have beat index returns. And this is what investors need to decide upon—consistency or thrill in their investments.
George Soros once said, “If investing is entertaining, if you are having fun, you are probably not making any money. Good investing is boring." In the pandemic-induced lockdown, stock trading has provided excitement for many. Too much attention can lead to an overreaction and can be an emotional drain. I have seen friends go from feeling high to low and constantly worrying about their stocks.
Social media is abuzz with videos on stock tips and how to pick stocks that give lottery-like returns. Mutual fund videos are not that many and parrot what the funds are saying rather than giving a critical view. Social media is not the right place for financial advice and while every video tells you where to invest, none tells you when to exit. Furthermore, not all the people making videos are financial advisers. Most are investors sharing their success in investing.
If you are contemplating stocks over mutual funds, ask yourself:
Do I have a strategy in place to invest?
* Can I keep up with ever-changing themes in the market?
* Can I regulate my exposure to stocks and sectors and have a rule-based exit plan?
* Do I have the time and resources to manage this portfolio in the long term?
* Is the allocation to stocks large enough to impact my overall portfolio and does it warrant the attention?
* Can I beat index returns consistently, when the best fund managers with large research teams are finding it difficult to do so?
* Finally, what is the impact on my emotional health in volatile times?
Choosing the right direction is much more important than speed. Many are going nowhere fast.
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