Whether to buy Mutual Funds or Shares Directly ?

Broadly there are two ways you can invest in equity .. either thru Mutual Funds or Directly buying Equity Shares. Not only new investors but old ones also face this dilemma and many times keep switching between the two. See if below helps : 

What to buy in share market is important but more than that what matters is your psychology. How do you cope up with ups and downs and daily volatility is more important. Do you get panicky when market falls and get excited when TV channels beat the drums ? Do you get frustrated when share your friend bought gets doubled but yours one is not moving at all ? There are many aspects to human psychology.. Neither do I know all nor I can write all I know but point is that think about what kind of person you are 

If you honestly have control on your emotions..do not easily get panicky or euphoric then you can go through direct equity else better to go via mutual funds. Key is to honestly answer what kind of a person you are. Advantage with mutual funds is that NAV changes only at the end of the day and fluctuation is not as much as in direct shares whereas individual shares are going up and down every second during the trading day so it becomes difficult to control yourself if you have not tuned yourself to these ups and downs

Coming to which will give better returns - mutual fund or direct equity ? There is no straight answer. If you are a great stock picker (which every one thinks he is but mostly is not) then you can do better than mutual funds but else mutual fund is the better route. My experience is that investing directly in shares is time consuming process.. it will take years before you pick up the right stock picking skills and understand what to buy and what not.. and dont forget then you need skills to decide what and when to sell as well..so it is time consuming process. If you are ready to invest few years in learning then it is worth to directly invest in shares but if you are frequently asking friends or tracking various channels to check the new recommendations then better stop and go via Mutual Funds

Three Variables

There are only 3 variables that decide whether you make big money or not .. and these are captured in Big Money = P(1 + r)^t 


The three variables are P (Principal Amount), r (Annual Rate of Return) and t (Time in Years)

P is straight forward.. You have more  capital, you make more money on it assuming other things remain same. So if you are born to a rich family and inherit couple of  million dollar then you make decent money even if you put in safest bonds. But if you are not that lucky then you need to concentrate on the other two

r (Rate of Return) : This is where most of the people are focused upon and spend their energies.. They want to grow the money at highest rate in the share market. Many come to market to double, triple in a matter of weeks and months and most end up losing in the game

T (Time) is time .. Most difficult part. Everyone thinks they do not have it and want to get rich now. What is the use of getting rich once you are old..?

Principal is off course important. It matters if you start with 1 Thousand, 1 Lac or 1 Crore.. We all know that so let us leave that part. Problem is focusing too much on r.. this is the most difficult to achieve.. How much will be your annual return depends a lot on market state.. In Indian market context think of year 1999-2000, 2006-2007 or more recently 2014.. almost everyone who was invested in these years would have made good amount of money.  Mostly anything and everything went up like crazy.. however if you think of 2001, 2008 or 2015.. most actually lost money or did not make decent. So r (annual return) is never linear in stock market.. There will be few years where you can make 100% without doing any extra effort and there will be few years where you will actually lose despite selecting the best scripts..So what to do ? 

Do not push yourself too much after 'r' and keep 't' in mind - Recognize this fact that returns are not linear. Wait for good years but ensure you do not lose the capital in bad years. Consider this - if you make 50% CAGR continuously for four year but lose 50% in 5th year then your annual return at the end of 5th year is reduced to 20%

Principal Amount = 100000


If you are very smart then you can get out of the market before the start of bad period and get in  before the start of good period.. but I have not met any such person yet who has done this successfully over multiple cycles. For me, I stay invested in good companies and wait for good years. Year 2007 was very good for me ..2008 quite bad (but P was small for me those days), 2009 again good, 2010 to 2013 was so so, 2014 bumper year, 2015 average .. Other than 2008, i have remained positive in all other years. And that is what my strategy is.. do not compromise quality to get extra returns...rather stay invested in good companies and wait for another 2014.. when it comes it will pay for all previous years.