Why Self-trading is better than investing in mutual funds?

I come across a lot of people who are investing in Mutual Funds or SIP and hear them say that “equity investment is gambling”. I ask them a simple question do they know what is a Mutual Fund! Lets, under stand “Why Self-trading is better than investing in mutual funds“.

Self-Trading and Mutual Fund

Mutual Funds are often sold with a disclaimer that mutual funds are subject to market risk! What is this market risk? In simple words if stock market goes down – no mutual fund will save your investment. So, How mutual fund saves your investment and give you more return than the market? In-fact most mutual fund invest in stock market, which you call gambling! Why mutual funds are bad and why self-trading is better than investing in mutual funds. Let’s bust some myth about mutual funds:

Myth: Mutual fund diversifies your investment so your investment is safe in the stock market.

Busted: Diversification or over-diversification? For example in a lemon tea, you need perfect lemon, suger, water and tea to taste it good. How if we add 5 liters of water into 2 spoon of tea? It won’t be good, right?

The same happens with mutual funds some are so much over-diversified because of the regulatory norms that they don’t give you any good return.

A mutual fund cannot have more than 25% of its investment in one single stock. The other remaining balance of 75% must be divided among at least 15 different securities so that not one of them represent more than 5% of the total mutual fund. Furthermore, none of these 15 stocks can own more than 10% of the stake in any one company also owned by the mutual fund company.

What’s Good: As a retail investor you are free from limited and tight regulatory norms. You can even hedge your position freely and reduce your risk. You can exit market immediately if it falls, you are not impacted by the Impact Cost.

Myth: Mutual Funds are managed by experts. You are not an expert or an analyst. So, you can’t get good returns.

Busted: If that is the case why only 30% mutual funds are performing good. How do you know the fund manager is highly qualified? Many mutual fund managers have proven not that good at picking shares than an average non-professional, but still they charge you fees for that.

Top investors like warren buffet, Benjamin Graham, John Templeton, Philip Fisher once a time all where common people. Just like you.

Remember, No one can manage your funds better than you.

What’s Good: Investing is not a rocket science anyone can invest. You just need to learn to trade and how to pick the right company. Find out only three things before investing in any company.

1. Financial Health should be good – No too much of Debt and Working capital requirements are met.
2. Company must give you constant profits.
3. Stock Price must not be overvalued.

Myth: Mutual fund doesn’t charge anything and you don’t have to pay brokerage to them?

Busted: Mutual Funds often adjust their stocks in the portfolio they carry and this gives them mind blowing brokerage. Many times these are penalized by SEBI for excessive crunching in clients accounts. Apart from this, they also charge you entry or exit load (fee). This you have to pay while buying or selling a mutual fund.

Also, Every mutual fund deducts its management cost from the return they generate for their clients. A mutual fund’s gross return is depleted by their own expenses ratio. This could be could be very 2% to 3%.  So, if a mutual fund gives you 14% gross return, you are actually giving 20% of your profit to them (21.4% of 14% = 3%).

What’s good: Keep your stocks in holding  and don’t unnecessary trade. If you can lock your money in a mutual fund for 4 years, why can’t you hold stocks just for few months. Invest yourself and save more. Remember, Banks in India gives you only 7% to 8 % an year. So, 3% is big you are giving to a mutual fund.

Myth: Mutual Fund or SIP investment has given 25 % CAGR in 10 years and Sensex gave just 15% CAGR years since 1980.

Busted: How can you take big duration for Sensex and small duration for Mutual Funds. If I change the mutual funds base year. The results will be completely different. The fact is that, a mutual fund can never outperform market returns in an efficient market. Do you remember year NIFTY went to 9000 in Feb 2015 from 6000 in Feb 2014.

A growth of 50% in a year for the entire stock market. Does any mutual fund gave you 50% return?

What’s good: Mutual fund doesn’t give you control over your money. So, you may only get best returns if you invest yourself in the market.

Myth: We can trade mutual funds like stock. So, we can exit anytime.

Busted: Most of the mutual funds don’t have liquidity when you want to trade. Also, not every mutual fund can be trade. Also, the value of mutual fund it based on NAV, often you don’t get the right NAV while selling. You may have to sell them at discount.

What’s good: Simply trade shares, they are well liquid. You can freely trade in any company. Also, margin trading can give you awesome returns if you manage your risk properly. So, you need to invest little time in learning risk management.