Dhirendra Kumar explains the hierarchy an investor should follow based on his experience in the market
Is it a good strategy to do SIP in direct equity stocks? How is it different from an SIP in mutual funds?
- Durgesh Kinnerkar
Conceptually, it is the same. Why I suggest SIP in an equity fund is why one should be investing in direct shares in a staggered manner. You can choose a good company but can't be sure if it is at the best price. So spreading the investment over time reduces risk and anxiety.
But it is not the same as investing in a mutual fund. While investing in a mutual fund, you have the benefit of convenience and professional management. Also, the tax implication would only occur when you sell the investment. Sale and purchase transactions done by the fund manager in the portfolio are not liable to tax.
As compared to that, you will have to keep an eye on your investments if you invest directly in shares. You will have to keep an eye on which stock has become expensive, which stock has become attractive, what to buy, and what to sell. So it requires some degree of active involvement even if you invest in a staggered manner. So if you have the time, inclination, temperament, and if you enjoy doing these things, go for the shares. Otherwise, entrust your money to a good mutual fund scheme. Also, if you are investing just Rs 5,000-10,000 a month, it may not be worthwhile to be an active investor.
I would say that there is a hierarchy based on your experience, which every long-term investor should follow. Everybody should start with a balanced fund or a tax-saving fund. Invest in it for at least one-two years, and you will understand volatility. Then start investing in two-three diversified equity funds. You can move all your money here, which has accumulated in the balanced fund. Continue your investment for another two-three years.
After these five years, if you think you can reconcile with the ups and downs of the market, you enjoy reading the annual report of a company, have understood how to choose a good stock, and have the temperament to invest in stocks even when they are going down because you have conviction, only then go for direct shares. These are the understandings and skills that are required to invest directly in shares.
Further, don't do it in one go. Start with moving just 20-25 per cent of your equity accumulation directly in shares. Try it for one year. If all goes well, make it 50 per cent, wait for another year or so, and then make it 75 per cent. This will be a systematic way of learning equity investments. The advantage would be that you will save on the management fee that you otherwise incur in mutual funds for their service.
So I don't think that one should hurry. Instead, follow this five-year plan and don't get attracted to the market to make a quick buck. If you are getting attracted to the market thinking that people make easy money, remember that people also lose money as easily. You might also get attracted to Futures and Options. Don't get into them. They are very risky. For derivatives, Warren Buffett once quoted them as weapons of mass destruction. And if at all you get attracted to it, try it out with a tiny amount of money first so that you understand the nuances without risking all your money.