Investing is all about making informed decisions and choices so that we can achieve our financial goals. Financial goals are our destination we can take different routes of financial instruments to achieve it.
Suppose, if we want to go to Goa we have different travel options to reach Goa such as…
Those who love the thrill (and of course have money) and can take the risk may go with a helicopter,
Those we afford airfare can go by plane,
Those who own a car and knows driving will drive down by a car and
Those who want the low-cost vehicle, do not want to take undue risk, look for safety and security, believe the trained driver and wants a regulatory official body to govern, can go by train and state-owned buses.
You can resemble all these vehicles with different financial instruments available in the market.
The helicopter can be future and options,
An aeroplane can be a PMS,
A self-driven car can be Direct Equity
and train and state-owned buses can be Mutual Funds.
Each and every financial instrument is different and has unique features. They carry their own risks as well as the ability to give returns. We need to aline our risk-taking capacity with their risk and return feature.
Many times investor has a dilemma can s/he invest in direct equity in SIP way same as they can do with mutual funds? You can surely go and buy good quality stocks on Nifty and Sensex in SIP way every month, provided
You are able to give yourself time to learn the stock market,
If you are able to understand the risk-return relationship of equity,
If you can control your emotions
And if you do not allow your emotions to interfere with the process of buying and selling direct equity
Investing in stocks can be fruitful for you and you can build wealth through it only if you consider direct equity investing as an “active investing method” You have to be constantly vigilant when you invest in stocks. You can not map single stock with any of your financial goals as it will be a huge concentrated risk and you never be able to predict its future value because direct equity being the riskiest financial product and volatility nature of the share market.
You can do so with Mutual funds because Mutual funds help in diversifying such risk among 50 to 100 stocks and variations in NAV of the mutual fund is not that sharp as compared to Direct Equity. Equity mutual fund investment is also subject to market risk but one can have those in your portfolio if the financial goal is 7+ years away. Still, it can be risky for a conservative investor. In comparison with Direct equity mutual fund investment is the comparatively low-risk product and that’s why we can map investment in mutual funds to our financial goals.
When you buy stocks in SIP way it will also work on rupee cost averaging method and you can average out the cost price. The risk here is only that when the particular share’s price keeps on declining we keep on putting more and more money as we get emotional with the stock or else we want to hide our failure in front of others so to average out we just keep on bumping money but such emotional decisions get us in big trouble which many experienced recently in Yes Bank and long back in Reliance power. You have to be very sure about the stock fundamentally as well as technically. You can not ignore the noise and timely exit is very important in Direct Equity.
One can create huge wealth by sticking to some stocks also such as HDFC Bank, Reliance, Infosys. These stock made great wealth for the investors who purchased those initially and kept on holding for years. I heard one example where the relatives gifted HDFC bank shares worth Rs 25000 to a boy on this naming ceremony 20 years ago. Now that boy after 20 years is already a lakhpatti. Such things also happen and one can create such wealth provided you can have an appetite to bear looses which may happen in future.
It is preferable to take the mutual fund route to be in equity asset class to achieve your financial goals. Once your financial planning for theses basic life goals are done, you can invest your excess money in direct equity. This money should be extra money where you can take a bet, where you can take the risk and where you can have a stomach to digest the losses if happens. Extreme greed and extreme fear both are dangerous for wealth creation. In direct equity have a rule to do periodic profit booking and have a stop loss for each and every share.
I personally use my extra money to buy good bluechip stock and I never depend on this money for any of my short, medium and long term financial goals. I mapped these stocks with my WEALTH CREATION GOAL and this goal is having all 3 types of time durations. When I book periodic profits I earn money in short and medium-term goals and some shares which I am holding for a long time I am considering it for long term wealth creation.
Personal Finance is all very personalized. Take your own decision after analyzing your risk appetite and your investment philosophy.
Keep it personal. Keep it simple.