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Is the growing popularity of stock investing bad for mutual funds?

Dhirendra Kumar talks about why the growing trend of investment in direct equities is not a threat to mutual funds and how direct investment in equities calls for time, knowledge and constant monitoring.

For the last three-five years, most of the equity-based mutual funds could not beat the benchmark. Now, people are seen to be redeeming their mutual funds and investing in direct equities. Is this a bad sign for equity mutual funds?
- Navneet

No, India is a large country and mutual funds are growing very rapidly. It is true that many investors have started investing in direct equities. This could primarily be attributed to the convenience with which you can invest in equity now. You can start a brokerage account online. If you have a bank account that you can access online, a smartphone and your Aadhaar card, so you are good to go. It has become easy. Also, information on shares or companies has become more easily accessible. Many service providers are providing information on what to buy, what to sell. But personally, I don't think it is a very healthy trend because investing in equity is a very sensitive and time-consuming affair. It requires a good amount of learning. For some investors who have the time, inclination and interest and those who know what they are doing, it might be a good idea. However, most of the investors are simply investing without any knowledge about where they are investing and why.

Mutual funds differ from stocks. Firstly, MF is a managed portfolio where an expert manages your money. Secondly, you are able to put your money with convenience in a programmed manner. It enforces discipline and is positioned as a savings and investment vehicle. When a person invests in a mutual fund (especially equity mutual funds), he/she has the mindset to stay invested for a minimum of three-five years. However, with direct equities except for a very few stocks that are kept for a long duration, people tend to book profits by buying and selling stocks day in and day out. The equity market has taken its toll on investors and they are prompted to act more often. I believe this is a risky thing to do. However, it will take time for investors to understand this.

Now, I am coming to the aspect that mutual funds have not been able to beat its benchmark for the past two-three years. Yes, it is true that in the last two years, mutual funds, particularly large caps, have not been able to beat the index. But if you look at the past 10-year (non-adjusted) returns of the Sensex, it stands around 7-8 per cent. While multi cap funds on an average have delivered about 9-10 per cent and the returns of mid-cap funds for the same time period stand at about 12 per cent. Hence, one should not form a view that all funds have not been able to perform. In a country like India where there are a large number of good companies of different sizes and shapes, the exposure to mid caps, small caps and multi caps can be quite meaningful.

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