The Hindu Business Line : Stocks or mutual funds?

So, you have set your goals and decided to invest in equity. Should you invest in stocks or mutual funds? Well, you need to decide what kind of an investor you are.

First, consider if you have the kind of disposable income to invest in 15-20 stocks. That is how many stocks you will have to invest in if you want to create a well-diversified portfolio. Remember the familiar adage: Do not put all your eggs in one basket? If Rs 5,000 were all you have to spare, it would be impractical to invest it across many stocks.

Many beginners tend to focus on stocks that have a market price of less than Rs 100 or Rs 50; that should never be a criterion for choosing a stock. Also, brokerage could eat into your returns if you purchase small quantities of a stock.

On the other hand, you would be able to gain access to a wide basket of stocks for Rs 5,000 if you buy into a fund. Investing in funds would also be an easy way to build your equity portfolio over time.

Let's say you can afford to put away only Rs 1,000 a month in the market. You can simply invest in a fund every month through a systematic investment plan as a matter of financial discipline. You can save yourself the trouble of scouting for a stock every month.

That brings us to the next point. Do you have the time to pick stocks? You need to invest a considerable amount of time reading newspapers, magazines, annual reports, quarterly updates, industry reports and talking to people who are familiar with industry practices. Else, you certainly won't catch a trend or pick a stock ahead of the market. How many great investors have you heard of who have not made investing their full-time job?

Plus, you may have the time, but not the inclination. You have to be an active investor, which means continuously monitor the stocks you pick and make changes — buy more, cut exposures — depending upon the turn of events. These actions have costs as well. As you churn your portfolio, you bear expenses such as capital gains tax. Funds do not pay capital gains tax when they sell a stock.

All this assumes you know what you are doing and have the skillsets to pick the right stocks. You are likely to be better at investing in an industry you understand. Only, too bad if that industry appears to be out of favour in the market!

If you love the thrill the ups and downs of the stock market offers; if you find yourself tuning into business channels and scouring business papers hoping that you can pick the next Infosys; if you have an instinct for spotting stocks and, importantly, the discipline to act on it; if you have the emotional maturity to cut your losses when you are ahead, then you can trust yourself to invest in stocks.

Otherwise, hand over your money to the professional.

Please send suggestions and queries to younginvestor@thehindu.co.in, or

The Research Bureau, The Hindu Business Line, 859-860, Anna Salai, Chennai-600002.

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