It is but natural to be attracted towards equity. The stories – some true and some fictitious – of people having become millionaires overnight, are bound to tempt anyone. But let’s face facts! Equity is not easy money; equity markets are not everyone’s cup of tea.

It’s your hard-earned money, which is at stake. So let’s be very objective about it.

Do you have sufficient investment capital?

It is plain common sense that a diversified portfolio with say 15-20 stocks is less risky than a concentrated portfolio with say only 3-4 stocks.

However, for a common investor, capital is usually limited. With this limited money supply it will not be possible for him to adequately diversify his portfolio. In such circumstances, MFs offer an alternative to be part of a well-diversified portfolio even with just Rs.100.

Of course, a concentrated portfolio could deliver super-normal returns. But then the risk is also very high. This high-risk high-reward strategy would not be suitable for a vast majority of common investors. It only suits a few select expert investors with very high net-worth.

Secondly, with limited capital it is difficult to buy high-priced shares say Reliance @2500 or Infosys @2000, etc. This forces us to buy low price shares. (Note that we are just talking ‘price’ here. This should not be confused with ‘value’. That is a subject matter for another discussion). Generally high-priced shares will be good stocks and low-priced shares may not be so good stocks. Thus, with limited capital we could end up with a substandard portfolio.

Given the fact that limited capital could mean concentrated and inferior portfolio, MFs may be a more preferable route for those who cannot bring in adequate money for investment.

Do you have sufficient stock market knowledge & expertise?

Ok, let’s be very honest and frank here.

    * Do we have more knowledge about companies, economies, markets, etc. than a well-qualified and experienced professional fund manager?

   * Can we read the balance sheets as easily as a fund manager and draw right conclusions?

    * Can we identify the upcoming sectors? Or those that could face downturn?

    * Do we have the soft skills such as risk appetite, intuition, discipline, patience and such other qualities, which distinguish a good fund manager/investor from a bad fund manager/investor?

In short, are we smarter than the fund manager?

In most cases, the answer would be ‘No’.

Then tell me why you, as amateurs, should enter the difficult terrain of equity markets, when we have the opportunity to let the best man (or woman) do the job for us?

Do we have sufficient time & resources?

For a moment let’s us assume that we have (a) big money to invest and (b) also a very good understanding of the stock markets.

But do we have the 3rd important criteria i.e. Time & Resources?

There are more than 6000 listed companies. Some of them are successful, some were successful and some will be successful. We need to buy stocks that will be successful; we need to get out of those whose successful phase is about to end; and we need to hold on to those who are still in the success phase. This timing is very critical