If you approach a financial planner for advice on financial planning, one of the most common advices given by financial planner is to invest in mutual funds. Since stock is supposed to outperform other asset classes in long term, particularly debt or fixed income instruments, the financial advisors stress on the fact that one of the easiest ways to beat inflation is to invest in stocks. Since an average investor may not have the skills to select stocks himself, mutual fund route of investment into stocks is suggested. Over a period of time, investors have been made to believe that mutual funds are the best option as far as investment into stocks is concerned. No wonder mutual funds find their AMCs growing and more and more schemes being launched.
However, very few analysts have made attempt to find how flawed this logic is. Let me take you through some hard facts on why you should not go for mutual fund route of investment into stocks. Please note this analysis has been done in Indian context and most of it will be applicable in global markets:
1) In India, 65% of the mutual fund managers have failed to beat the benchmark index over a time span of 5 years. The data is sourced from S and P CRISIL SPIVA analysis till mid June; 2011.This means that fund managers have not been able to manage a return, as good as the underlying index against which they measure the performance of the fund managed by them. This raises serious question on so-called expertise that mutual fund managers are supposed to have. If they cannot beat the underlying index, what is the point is having expertise. An investor will be better off investing in selected stocks from Nifty or Sensex.
2) There are around 1550 stocks listed on NSE, while there are 3300 schemes of mutual funds in India. Which one is easy to select? I am sure stocks on Nifty. If an investor has to put effort to identify a good mutual fund amongst 3300 mutual funds, why he should not put effort to find a good stock? Investors cannot rely on past performance of the mutual funds, as past performance is no guarantee for future returns. So how does an investor select an appropriate and suitable fund for him? This again requires so-called skills. So let an investor develop so-called skills to select a stock and not a mutual fund.
3) Please remember that your mutual fund charges a decent amount from you in form of expenses, which can be as high as 2.5% of the fund AUM. So if you invest into mutual funds, on an investment of Rs.10000, you will get end up paying cost of 2.25% which is around Rs 225 which is indeed very high. Investment into stocks directly comes at a much cheaper cost. This is logic for not investing into mutual funds.
4) As mutual fund investor, you cannot hold the fund manager responsible for his investment decisions, while as a shareholder you can ask a company about so many things including investment decisions, if any.
5) Last but the most important reason for not investing into mutual funds. If you invest directly into stocks, you grow as an investor. You are forced to study and analyse the stocks. This adds to your knowledge of the market and helps you grow in terms of knowledge on how the stock market functions. This is a great leap for an investor.
Please remember that you cannot leave your money to so-called experts who run mutual funds, as there is no need for expertise as far as investment is concerned. Investment is purely driven by common sense which all of us have.
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