Things to remember before switching from mutual funds to stocks
Since the COVID-led lockdown has been enforced in India, there has been a substantial rise in the number of new Demat accounts. Though it is good to realise that nowadays, more investors are shifting their focus to financial assets from physical assets such as real estate yet systematic investment plan (SIP) and lumpsum flows in MF investments witnessed a slowdown. This is probably indicating that some of the investors are moving towards investing directly into stocks, rather than investing via mutual funds.
Besides, it has its own set of advantages and disadvantages of investing directly. And now, it is the right time for the investors to evaluate how they wish to take exposure to their equity investments either via direct stocks or equity mutual funds. In this article, we would list the points you should remember before making such a switch.
Right benchmark
When you invest in mutual funds to gauge the performance of the fund manager, you compare it with an appropriate benchmark index and also, with its peers. However, when you are switching to direct stocks investments, it is prudent to carry out a proper benchmarking of your portfolio of stocks as against relevant index and also, against mutual funds. This will help you to understand how your portfolio of stocks is performing. Remember, when you are investing in mutual funds, there is an experienced fund manager backed by a research team but when you are investing in direct stocks, you are backed by his or her own reading and analysis.
Diversification
Investment in mutual funds such as multi-cap funds assures you proper diversification. This diversification is not just across sectors and stocks but also in terms of market capitalisation. Hence, when you are investing in stocks, you need to ensure that you are diversifying adequately across sectors and market capitalisation. Diversified equity mutual funds have mandates that ensure capping exposure to individual stock along with proper risk management practices while taking sector exposure. Hence, while investing in direct stocks, you need to ensure proper risk management practices.
Asset allocation
Further, when you are considering investing in direct stocks, do not forget the basics, i.e. allocating your investments to different assets. While investing in mutual funds, you must have hybrid funds that will take care of your asset allocation. Also, you can invest in equity and debt mutual funds to have a proper asset allocation as rebalancing is also quite easy. Hence, even while dealing with direct stocks, ensure that you are maintaining the asset allocation as per your risk appetite.
Active management
Directly investing in the stock demands active management while in the case of mutual funds, the fund management team takes care of all these things Further, actively monitoring your direct stocks portfolio, require a considerable amount of time for researching the company by avoiding the use of simple tools such as past performance of the stock. While doing so, you also need to manage your behavioural bias and should take decisions rationally and not emotionally.
Further, if you wish to invest in direct stocks then, you can go with portfolio advisory services (PAS), where the research & portfolio advisory part is taken care of. In short, you just need to invest.