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You should preferably invest in equity funds for your goal-based investments and directly in stocks for your trading portfolio. Many individuals prefer to invest directly in “blue-chip” stocks and in companies that are “fundamentally sound” for their goal-based investments. If you are one of them, it is worth considering why investing in equity funds is optimal.
The following are some of the reasons why investing in equity funds is optimal for your emotional and financial health: First, you outsource your investment decisions to a professional money manager when you buy units in an equity fund. Because generating returns is a function of both skill and luck, even the most skilful money managers can generate losses. And losses hurt emotionally and financially. Yet, the regret you will face is much less when the equity fund you invested in suffers losses than if your direct investment in stocks generate losses! This is because in the latter case, you are directly responsible for the investment. Second, regardless of your investment capital, you are likely to have fewer stocks in your investment portfolio than equity funds do. So, the likelihood that an equity fund betters your performance is higher because of the possibility that some stocks are always likely to perform poorly. What if you invest in 10 stocks and three of them perform poorly, as opposed to 5 stocks out of 30 for an equity fund?
Third, an active fund can move between equity and cash more quickly than you can, despite its size. This is because a money manager is likely to take a professional approach to deciding whether to take profits. You may be emotionally driven to taking a decision.
Finally, it is easier to invest in equity funds with a small capital and scale up as your savings potential increases with age. You need a significant amount of capital to invest directly in stocks. Many individuals typically setup systematic investment plan (SIP) on say 3-5 stocks every month. If you know how to read charts, you might as well pick 3-5 stocks at any point in time based on price momentum and trade actively. If you do not want to trade based on technical analysis, you can setup SIPs on 3-5 stocks and have a pre-defined profit-taking rule to capture short-term gains on a continual basis.
(The author offers training programmes for individuals to manage their personal investments)
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