This pandemic has led to indiscriminate use of the word “unprecedented.” The sharpest fall in the global financial markets recorded in decades was followed by a surprisingly faster recovery. Financial experts were surprised even more watching millions of new retail investors pouring in money into the stock market while the world witnessed this downfall.
Until this pandemic, the trend was such that during similar downfalls, retail investors would sell and run out of the markets and institutional investors would buy quality names at a beaten down prices. This time around something completely opposite has happened: retail investors has been investing steadily.
One thing that hasn’t really changed is that retail investors always go for bottom fishing and accumulate junk at junk prices. This is clearly evident by the rally in many penny stocks in the last month. These so-called Robinhood investors invest in penny stocks on hopes of high returns and end up losing their hard-earned money and probably will leave the market forever.
Since ages, we’ve all known that SIPs is the best way to invest in equity mutual fund schemes. Systematically and in a staggered manner investing in MFs have been known to have multifold benefits:
- Beats volatility
- Lower risk
- Expert managed portfolios
- Disciplined manner of investing
- Matches the income flow
With all these benefits and the huge flow of money into direct equities has made SIP in equity stocks or SIP in expert-created portfolios of stocks the need of the hour. Although such products have been in existence since the last 2-3 years, people have not understood its significance.
In my long experience of 20+ years in the capital markets I’ve seen a lot of people informally doing SIP in stocks and that too probably in poor quality or cyclical stocks. They buy such stocks with expectations of high returns and when those stocks start falling, they keep buying it at lower and lower prices and double down on their losing bets. Retail investors should do something completely opposite, invest in great quality stocks at regular intervals, preferably every month.
Stock picking with the help of mutual fund portfolios: Is it a smart strategy?
Let us understand with a few examples what can happen when you regularly invest in good quality stocks or a ready-to-invest mini-portfolio of stocks:
Scenario 1: If you did a monthly SIP in Asian Paints and bought one stock every month, this would have been the result:
Scenario 2: Example of Divi’s Laboratories:
Sceanario 3: The results if we did a SIP in a basket good quality stocks that have been grouped by market experts. I have taken the example of StockBasket:
*All returns exclude dividends
Retail investors can duplicate the results by just doing two things right:
- Automate your investments in equities
- Take help of an expert or invest in ready-made mini-portfolios
- Hold those Investments for a long period.
I urge these new-age investors to take advantage of reputed platforms where expert guidance is inbuilt, while investing their hard-earned money with lower costs than even mutual funds.
(The author is the Head of Research, Samco Group. )
Selling mutual funds to dabble directly in stocks? Have you done the homework?
(This article is part of a series ETMutualFunds.com has started on the issue of direct investments in stocks.)