subject: Why You Should Invest In Mutual Funds [print this page] For the common man, the stock market may seem like one big, turbulent ocean. I keep having people who ask me - which are the stocks that they should buy and more importantly when they should buy them...and finally how to go about managing their portfolio?
In a nutshell, the major concerns seem to be -
1. What stocks to buy?
2. When to buy the stocks?
3. When to sell the stocks?
4. How to monitor the stock prices?
There are consultants to help but for small scale investors hiring the services of a consultant is not cost effective.
It is a known fact, that out of the millions of people who buy and sell shares, there are only a handful who hold a valid trading account unless they are active traders who trade for a living. Many investors do not want to go through the procedures of opening a demat account and a trading account. And this practice is encouraged by some unscrupulous firms. These firms are a big attraction to the unsuspecting investor as they offer him the 'service' of letting him trade in the account of the firm. This is not only illegal but also dangerous for the investors. For by this practice, the firm becomes the only legal owner of all the investments instead of the investor who is doling out the cash for the payment for those investments.
What then, does the average investor sitting on surplus cash do? One solution is to open a trading account with a depository participant. The other solution - and this is particularly for those long term investors with no immediate need of funds who are not even remotely connected with investments like doctors, engineers, software professionals, etc - is to invest through mutual funds instead of investing directly in stocks.This is because, the mutual funds have professionally managed asset management companies (AMCs) who not only do the choosing of stocks for you, but also shuffle and reshuffle the fund portfolio of which the individual investor's fund is part.
The next step is to choose a good scheme. True, to choose a good scheme is no mean feat, but it is easier and more importantly, safer to choose a scheme within a fund than a listed company out of the millions of stocks listed on the stock exchange. First and foremost choose a fund with a good AMC. A good AMC is one that is run by expert professionals who track the market and fundamental factors and take timely entry and exit positions, thus enhancing the net asset value (NAV) of the fund. So choose a good AMC, preferably one that is backed by a reputed business group. Examples are Reliance, Tata, ICICI, HDFC, etc. All reputed AMCs would have their in-house consultants, called Relationship Managers to offer you the right advice, This way there would be no intermediary and the information/advice you receive would be official and correct. Also read the offer document carefully. This is not just a statutory warning! Really DO read it carefully and ask for clarifications if any.
So out of the four problems we started out with, what remains is a fraction of a single problem. Just choose a good fund and a good scheme under the fund - and leave everything else to the AMC! That way you don't have to look daily at the index (and panic!) and wonder how much you are down or up in terms of net wealth.
