Glamorous and tempting: but is direct investment in shares suitable for everyone?

Unsurprisingly, many people realized this and started investing directly in stocks. A look at the number of demat accounts opened shows a clear trend.

A friend recently shared that because he can now comfortably generate better returns with his direct stocks (than with mutual funds), he moved his entire portfolio into direct stocks. He started investing in MFs almost a decade ago, but his venture into direct equity started just two-three years ago.

So it is obvious that his recency bias made him do what he did like many others who these days are taking direct action in a big and serious way.

That being said, is it a sensible idea to only invest directly in stocks and not mutual funds?

People have strong opinions about this based on their individual experiences. And to be fair, there is no one-size-fits-all answer.

Investing directly in stocks gives you more control to build a focused portfolio that can attempt to generate higher returns and/or beat the markets (and MFs). However, with some experience, one understands that this is easier said than done.

The potential for higher returns exists in direct stocks, but there are also risks. And the reason is that if just a few of your stock picks in a concentrated portfolio start to perform poorly, your overall portfolio could take a serious hit. Experienced investors who have seen a few market cycles already know this. But those who have joined our markets in recent years and only seen it rise may not understand this and how to deal with a falling or bear market.

For the majority of the investor population, mutual funds should form the core of their capital allocation. A well-managed portfolio with a good mix of active and passive mutual funds provides good enough return results with high probability. This wouldn’t seem right when our rising markets have made it seem easy to make money in direct stocks.

A well-managed portfolio with a good mix of active and passive mutual funds provides good enough return results with high probability.

Most people don’t have the time or skill to properly analyze the business behind the stocks. Besides, picking one or two good stocks is one thing. But building a well-diversified portfolio of multiple stocks with proper allocation and then generating consistent returns over the years (like mutual funds do) is a completely different ball game.

If you are an experienced direct stock investor with years of solid experience, you can skip the rest of this article. But if you’re not, and you’re increasingly tempted to invest heavily in straight stocks at the cost of (ignoring) mutual funds, then read this.

Also read: A veteran trader reveals how to maximize profits from your investment

Capital allocation

Continue to maintain your core capital allocation only through stock mutual funds or ETFs. As? At least 80%. If you are new to markets, choosing good mutual funds is not rocket science and you can opt for a few schemes from different fund categories that will help you sufficiently diversify into different market capitalization segments like largecap, midcaps and smallcaps.

Also read: The exit of FIIs from India is not a surprise. But where is their money going?

Once the core equity MF portfolio is established and you still want to invest in direct equities, you can start with a small allocation. How you choose your actions is important. Please do not invest blindly based on tips you receive from friends or social media. This will eventually stop working.

How much you invest in direct stocks would depend on your actual investing experience, your interest (and ability to dedicate time) to researching individual businesses and sectors, etc. After a few years, it will automatically become clear whether your direct stocks are doing well or your MFs. Ideally, this evaluation period should also include a stint in weak or falling markets. This is because this is where true investors are tested.

For those curious, the author is a small investor who invests in both mutual funds and stocks. Fascinated by stocks, over time the author has invested in direct stocks and benefited from them, but likes to diversify within equity assets and has therefore invested directly as well as through proven and well-managed mutual funds.

Dev Ashish is an RIA and founder of StableInvestor.