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It is our hard-earned savings, which is at stake. So let's be very concrete about it.
Do you have adequate capital?
It is sheer common sense that a diversified portfolio with 18-20 stocks is less risky than a small portfolio with only 3-4 stocks.
However, for a retail investor, capital is normally limited. With this small money supply it won't be likely for him to adequately diversify his/her portfolio. In such a condition, Mutual Funds extend an alternative to be a part of well-diversified portfolio even with small capital like $100.
Naturally, a small portfolio can give super natural returns but on the other hand the risk is also very high. This high-risk high-reward scheme wouldn't be appropriate for absolute majority of retail investors. It just suits a couple of select expert investors who have lots of money to put into market.
Also, with moderate capital it's hard to buy pricey shares like Google, Infosys etc. This drives us to buy low price stocks. Broadly speaking high-priced stocks will be good shares and low-priced stocks might not be that good shares. Hence, with limited capital you could end up with a inferior portfolio.
Given the fact that moderate capital could mean small and inferior portfolio, Mutual Funds perhaps are more preferable path for those who cannot bring in enough money for investing
Do you have adequate knowledge & expertise?
Ok, let’s be really honest and frank here.
· Do you have more expertise about companies, economy, market trends, etc. than a qualified and knowledgeable professional investment company?
· Can you interpret the balance sheet and Annual Reports as easily as an investment company and make right conclusions?
· Can you identify the future sectors of growth? Or those that could face a downswing in the immediate future?
In short, are you more knowledgeable than an investment company?
In 99% cases, the answer would be ‘Nope’.
So why do common retail investors enter the hard terrain of securities industry, when you have the chance to allow the exert people to do the task for you?
Do you have adequate time & resources?
Let’s presume that you have big bucks to invest and also a really sound understanding of the equity markets. But do you have the third important criteria, “Time & Resources”?
There are numerous listed companies. Some of them are booming, some were booming and some will be booming. You need to purchase stocks that will be flourishing; you need to exit those whose flourishing phase is about to cease; and you need to hold on to those who are still in the success phase. The timing is very decisive for making fortune in stock markets.
Now this list keeps varying quite frequently and it calls for constant research to keep oneself updated. So, there won’t be many retail investors who can afford to devote time to study thousands of annual reports and tracking the performance of companies. Moreover, yearly reports are not all that is needed to research a company. How many of us can travel to company premises, contact their management and talk over their plans, earning expectations, etc.? Can you talk personally to the industry experts? Even if you can do all of this, can it be done on an ongoing basis - day after day every year?
So who is best person to do a sound research - a Mutual Fund with its’ experienced research squad or you, who are as too occupied with our own businesses/job?
Unlike all this, opting for Mutual Funds is a comparatively much easier task. Also, it does not ask for close monitoring. Hence it becomes the finest option for retail investors to relish the yields of stock market, without being forced to commit lots of time and effort.
Category: InvestingWhy Mutual Funds Are A Better Option For Retail Investors was written by:Author:LavanayAdded: Mon, 28 Apr 2008 02:52:15 -0400 This Article Has Been Read 97 times View all Lavanay's articlesAbout the Author: Lavanay is an Investor active in Indian Share Market for last 4 years. He provides Stock Tips India and Mutual Fund Tips on his Forum Bazaarlive.info |
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