Direct Stocks or Mutual Funds

Direct Stocks or Mutual Funds?

Investor - I want to invest in Equities. 

Me - How long can you stay invested, how much risk can you take & what's your return expectations?

Investor - I can stay invested for 10 years, okay with volatility & return expectation is 12-15%. 

Me - Okay, we will invest in ABC Flexicap, XYZ Midcap and PQR Small cap Mutual Funds. 

Investor - Can we not do direct stocks?

Me - You want to generate returns, how does it matter where these returns are coming from (Direct stocks or MF)? Also you are not going to be able to track sector rotation, corporate actions & news etc. As a retail investor, MF is a much better option & it will make you the returns you are expecting over 10 years. Should you also take the stress of looking at so many stocks & decide everytime to buy, stay invested or sell? 

Investor - But direct stocks will generate higher returns? 

Me: It's a misconception.

- In direct stock investing, the broker app does not show you the portfolio XIRR and hence you don't understand your overall return. 90% investors can't beat the FD returns also over time.

- One stock may have done very well but the overall portfolio return is always grey and hence we feel the returns are high.

- While you are investing in a Mutual Fund, your money is invested in stocks only, exactly what you are expecting. If you want to take higher risk to generate higher returns, that's also very much possible, increase allocation to Mid & Small cap and give it at least 10 years. But if you are going to compare 1 stock that you bought which gave 50% returns to a large cap fund which is a portfolio, it's not a fair comparison. And you have discovered that stock after it has given 50% return not before.

- Also the most important thing is you will not be able to consistently find such stocks without losing money on some stocks & hence your net returns are no where close to the return that your 1 stock gave.

P.S. - Right combination of Mutual Funds & decent time horizon can generate 12-15% CAGR which is decent in Equity investing.

- If you want more you need to accept the risk and allocate higher than normal to Mid and Small cap funds & you will generate higher returns over time.

- But if you think investing in direct stocks will consistently be able to make a retail investor get 30-35% return, you are probably amongst the top 0.1%, How sure are you to be in that 0.1%? - for everyone else there is a Mutual Fund.