Investment Plans in India
Content
JAIPURIA INSTITUTE OF MANAGEMENT,LUCKNOW
MUTUAL FUND INVESTMENT ROUTE IS SAFER
WAY OF INVESTMENT IN EQUITY SHARES
THAN DIRECT INVESTMENT IN STOCK
MARKET FOR RETAIL INVESTOR.
F.M.S. PROJECT
TO, Mr.P.K.SRIVASTAVA
12/19/2013
REPORT BY GROUP 1PRAKRITI FS40
PANKAJ KUMAR SINGH FS34
PARITOSH SINGH FS35
ROMANSHU VARSHNEY FS64
RAJNEESH SHARMA FS44
Table of Contents
ACKNOWLEDGEMENT ................................................................................................................................... 4
MEANING ............................................................................................................................................ 5
A.
B. HERE ARE SOME OF THE ADVANTAGES WHICH MUTUAL FUNDS’ PROVIDES ITS
INVESTORS’ VIS-À-VIS THE DIRECT ROUTE TO EQUITY INVESTMENTS: ................................. 5
I.
Diversification................................................................................................................................... 5
II.
Professional Management ................................................................................................................. 6
III.
Lower Entry Level ........................................................................................................................ 6
IV.
Economies Of Scale ...................................................................................................................... 6
Innovative Plans For Unit-Holders ................................................................................................... 6
V.
VI.
Liquidity........................................................................................................................................ 7
VII.
Minimizes Loss ............................................................................................................................. 7
C.
INVESTING IN EQUITIES HAS A RISK-REWARD ASSOCIATION WITH IT. ................................................ 7
D.
CONSIDERATION FOR INVESTMENT IN EQUITIES: .................................................................. 8
E.
Determine Your Risk Taking Capacity:............................................................................................ 8
Align Investments To Overall Financial Plan: .................................................................................. 8
DIRECT INVESTMENT VERSUS INVESTMENTS THROUGH MUTUAL FUNDS .................. 9
F. COMPARISION OF TOP THREE MUTUAL FUND OF DIFFERENT EQUITY SECTORS VS DIRECT EQUITY
INVESTMENT. ................................................................................................................................................ 9
G.
1)
Fund Name- ICICI Prudential Mutual Fund ................................................................................... 9
2)
Fund Name- Birla Sun Life Mutual Fund .................................................................................... 12
3)
Fund Family- UTI Mutual Fund .................................................................................................... 14
CONCLUSION:...................................................................................................................................... 17
1
TABLE OF TABLE
Table 1......................................................................................................................................................... 10
Table 2......................................................................................................................................................... 12
Table 3......................................................................................................................................................... 15
2
TABLE OF FIGURE
Figure 1 ....................................................................................................................................................... 10
Figure 2 ....................................................................................................................................................... 11
Figure 3 ....................................................................................................................................................... 11
Figure 4 ....................................................................................................................................................... 12
Figure 5 ....................................................................................................................................................... 13
Figure 6 ....................................................................................................................................................... 14
Figure 7 ....................................................................................................................................................... 15
Figure 8 ....................................................................................................................................................... 16
Figure 9 ....................................................................................................................................................... 16
3
ACKNOWLEDGEMENT
We would like to express our special thanks of
gratitude to my sirMr.P.K.SRIVASTAVAwho gave
us the golden opportunity to do this wonderful
project on the topic“Mutual Fund Investment Route
Is Safer Way of Investment in Equity Shares than
Direct Investment in Stock Market for Retail Investor.
Elaborate By Studying The Performance Of Top 3
Equity Mutual funds Over The Last 3 Year Period
Vis-A-Vis Performance Of Stock Market Index
During The Same Period”which also helped us in
doing a lot of research and we come to know about
so many new things. I am really thankful to you.
We are making this project not only for marks but
also to increase our knowledge …
Thanking you.
4
A. MEANING
Mutual funds are investment vehicles that pool money from many different
investors to increase their buying power and diversify their holdings. This
allows investors to add a substantial number of securities to their portfolio for a
much lower price than purchasing each security individually.
A mutual fund is set up in the form of a trust that has a Sponsor, Trustees, Asset
Management Company (AMC). The trust is established by a sponsor(s) who is like
a promoter of a company and the said Trust is registered with Securities and
Exchange Board of India (SEBI) as a Mutual Fund. The Trustees of the mutual
fund hold its property for the benefit of unit holders. An Asset Management
Company (AMC) approved by SEBI manages the fund by making investments in
various types of securities.
The trustees are vested with the power of superintendence and direction over the
AMC. They monitor the performance and compliance of SEBI regulations by the
mutual fund. The trustees are vested with the general power of superintendence
and direction over AMC. They manage the performance and compliance of SEBI
Regulations by the mutual fund.
B. HERE ARE SOME OF THE ADVANTAGES
WHICH MUTUAL FUNDS’ PROVIDES ITS
INVESTORS’ VIS-À-VIS THE DIRECT
ROUTE TO EQUITY INVESTMENTS:
I.
Diversification
Investing in stocks directly has one serious drawback - lack of
diversification. By putting all money in just a few stocks, the investor
subjects himself to considerable risk should even one of those stocks
decline.
On the other hand, a mutual fund scheme by investing in several stocks tries
to overcome the risk of investing in just 3-4 stocks. By holding say 20 to 30
stocks, the fund avoids the danger that one rotten apple will spoil the whole
portfolio. Mutual fund schemes own a couple of dozen to more than a
hundred stocks in their portfolio. A diversified portfolio can generally
5
hold its downside even if a few stocks fall dramatically. This helps in
containing the overall risks.
II.
Professional Management
No matter how sound an investment sense a stock investor may have, sooner
than later he will realize that active portfolio management requires
considerably more skill, not to mention a lot of time too. There is an ocean
of a difference between part-time stock-picking and full-time fund
management.
Now compare this to mutual fund investing; the mutual fund investor does
not have to track the prospects and potential of companies in the
portfolio. Mutual funds are managed by skilled professionals who
continuously monitor these companies and take decisions on whether to buy,
sell or hold a particular stock in the portfolio.
III.
Lower Entry Level
There are few quality stocks today an investor can enter into, with just Rs
3,000 – Rs 5,000. Investing in stocks can be an expensive affair. Sometimes
with as much as Rs 5,000 an investor can buy just a single stock.
The minimum investment in a mutual fund may be as low as Rs 500. This
implies that with just Rs 500, a mutual fund investor can take exposure in a
fund portfolio of 20-30 stocks. The entry barrier in mutual funds is low so as
to encourage investor participation.
IV.
Economies Of Scale
By buying a handful of stocks the stock investor loses out on economies of
scale. This tends to pull down the profitability of the portfolio. If the investor
buys/sells actively, the impact on profitability would be that much higher
due to the various charges involved.
Due to frequent purchases/sales, mutual funds incur proportionately lower
trading costs than individuals. Lower costs translate into significantly better
investment performance and returns to the investors.
V.
Innovative Plans For Unit-Holders
By investing in the stock market directly, the investor deprives himself of
various innovative plans that are offered by fund houses. Fund houses offer
automatic re-investment plans; systematic investment plans (SIPs),
systematic withdrawal plans, asset allocation plans, triggers, etc. These
6
features allow investors to enter/exit or switch from funds seamlessly and on
the whole facilitate investment ease significantly. This is something the
investor can never duplicate individually.
VI.
Liquidity
A stock investor may not always find the liquidity in a stock to his liking.
There could be days when the stock is hitting the up / down circuit and
buying/selling is curtailed. This does not allow him to enter / exit a stock.
Such liquidity problems are not confronted by a mutual fund
investor.Sometimes a mutual fund may be more liquid than other investment
avenues. For instance, there are days when there are no buyers or sellers for
an individual stock. But an open-ended fund can be bought / sold at that
day's NAV by simply approaching the fund house or its registrar or a
distributor.
VII.
Minimizes Loss
Investing in mutual funds assures more safety of investment than investing
directly in stocks. A company may shut shop or may go bankrupt and
according to the law, the equity shareholders are paid last, after paying all
dues to the creditors of the company.
A mutual fund may lose money, but may not go down as easily as a
company. The legal structure and stringent regulations that bind a mutual
fund safeguard a unit-holder's interests far better. As highlighted above,
investing in mutual funds has some unique benefits that the direct stock
investor would find it difficult to duplicate. By no means are we are stating
that mutual fund investing is a sure-shot way of logging growth. This can be
done even by investing directly in stocks. However, mutual funds offer the
investor a relatively safer and surer way of picking growth minus the hassle
and stress that has become synonymous with stocks over the years.
C. INVESTING IN EQUITIES HAS A RISK-REWARD
ASSOCIATION WITH IT.
Before we take the plunge, here are a few things you need to remember:
Investing in equities is highly risky, but at the same time, can get you
attractive returns over the long term. Direct investment in equities is possible
by purchasing shares of companies listed on stock exchanges. You can also
7
enter equities by investing in mutual funds, getting into portfolio
management schemes or playing through the derivatives market by taking
exposure to futures, options and structured products. With such a plethora of
options available, it is sometimes confusing as to what is the best mode of
entering the equity markets.
The mode of investing in equities depends on your risk tolerance and risk
aptitude, in addition to your goals and financial situation. Those with high
risk appetite would wish to invest directly in stocks or take an exposure to
derivative products. In these methods, although the returns would be high,
the risk is also very high, which may sometimes result in erosion of your
investment.
The risk-averse would prefer to enter equities by investing through mutual
funds. Here, although mutual funds mirror the stockmarket performance,
you may get slightly lower returns than if you would have invested directly
in high-return stocks.
As a long-term strategy, it is best to invest in mutual funds, especially if you
do not have the time and knowledge for direct stockmarket investing.
D. CONSIDERATION FOR INVESTMENT IN
EQUITIES:
Here are a few things you must consider when you invest in equities:
Determine Your Risk Taking Capacity:
As mentioned earlier, equity investments come with high risks. You may
sometimes even lose out on your initial investment amount. Hence, you must think
of getting into equities only if you are comfortable with the volatility associated
with stock markets, especially over the short term. Equity exposure should be
based on your goals, age and risk profile.
Align Investments To Overall Financial Plan:
The objective and duration of your investment are important determining factors.
Your investments should be aligned to your financial goals. Equity mutual funds
are best suited for long-term goals, with duration of over five years.
8
E. DIRECT INVESTMENT VERSUS
INVESTMENTS THROUGH MUTUAL
FUNDS
Under RGESS there is a limited flexibility in terms of investment. As per RGESS,
investments made in shares which are part of BSE-100 or CNX 100 index are only
eligible. Additionally listed shares of Navratna, Maharatna and Miniratna publicsector undertakings, and initial public offers (IPO) of PSUs, whose turnover is
more than Rs 4,000 crores, are also eligible for investment. If you decide to invest
through mutual funds, you end up paying costs which depend upon the slab and
can go as high as 3% of the corpus. This is definitely higher than the investment
expense that you will end up incurring. With brokerage charges nose-diving, the
cost of charges will be less than 3% for you. Additionally since the mutual funds
can invest in limited stocks, benefits arising from skills that mutual funds have will
get diluted. In the earlier version of equity linked tax savings scheme i.e. ELSS,
mutual funds could not perform exceptionally well. Since mutual funds will
redeem RGESS scheme after 3 years, there is limited time available to mutual
funds to perform, while as an individual investor you can stock for longer period in
the investment. Mutual funds offer one advantage over direct investment since
mutual funds are allowed to churn portfolio which individual investors are not
allowed for a year under RGESS. Of course, other conventional advantages of
investment through mutual fund stay. Since investors in RGESS will be first time
investors, it will be better to start investments through mutual funds in spite of all
shortcomings that mutual funds have.
F. COMPARISION OF TOP THREE MUTUAL FUND
OF DIFFERENTEQUITY SECTORS VS DIRECT
EQUITY INVESTMENT.
1) Fund Name- ICICI Prudential Mutual Fund
Fund Class- Large Cap
9
Comparison of return of this fund and Nifty over 5 years
Figure 1
Fund Return over five years
Table 1
1 year (%)
12.3
2 year (%)
19.8
3 year (%)
7.3
5 year (%)
20.3
Comparison of return of this MF with some of its holding
10
Bharti Airtel return over 5 years
Figure 2
Price on 13th of April 2009 is 337
Price on 6th of December 2013 is 331
So its return over 5 years of Airtel is -1.8%
Reliance Industries return over 5 years
Figure 3
Price on 6th of April 2009 is 836
11
Price on 13th of December 2013 is 860
So its return over 5 years is 2.87%
Here return of Large cap equity mutual fund is 20% over five years but
stocks have given poor return over 5 years of span.
2) Fund Name- Birla Sun Life Mutual Fund
Fund Class- Small & Mid Cap
Comparison of return of this fund and Nifty over 5 years
Figure 4
Fund Return over five years
Table 2
1 year (%)
7.1
2 year (%)
20.2
3 year (%)
9.2
5 year (%)
27.8
Comparison of return of this MF with some of its holding
12
Jain Irrigation Systems return over 5 years
Figure 5
Price on 4th of February 2009 is 65
Price on 10th of December 2013 is 70
So its return over 5 years is 7.6%
13
Fulford (India) returns over 5 years
Figure 6
Price on 27th of April 2009 is 480
Price on 10th of December 2013 is 615
So its return over 5 years is 28.12%
Here return of mid and Small cap equity mutual fund is 28% over five
years but some stocks have given poor return while some have given
good return over 5 years of span.
3) Fund Family- UTI Mutual Fund
FUND CLASS Diversified Equity
Comparison of return of this fund and Nifty over 5 years
14
Figure 7
Fund Return over five years
Table 3
1 year (%)
2 year (%)
3 year (%)
5 year (%)
7.7
18.8
10.6
24.8
Comparison of return of this MF with some of its holding
15
Ashok Leyland returns over 5 years
Figure 8
Price on 8th April 2009 is 10
Price on 10th December is 16
So return of this stock is 6%
Suzlon Energy return over 5 years
Figure 9
16
Price on 17th April 2009 is 58.
Price on 13th December 2013 is 9.
So return of this stock is -84%.
Here return of Diversified equity mutual fund is 25% over five years but stocks
have given poor return over 5 years of span.
G.
CONCLUSION:
Investments may be in direct equities or mutual funds require a lot of time and
energy. Each approach has its own advantages and disadvantages. Direct equity
investing is considered more dynamic by the investor community and thus, those
who can keep a continuous tab on the equity markets prefer the direct equity route
as it gives them much needed zing and excitement. However, the dynamism in the
direct equity investment comes with risk. Hence, only those investors who are able
to understand the nitty-gritty of the equity markets and who are able to devote time
and energy can adopt this route to equity
But not all investors are same in their intelligence and understanding levels. And
even if someone has the ability to understand the direct equity route, he or she
lacks the time to devote to such investment activity and thus prefer taking the
indirect route to equity investments which is mutual funds. Mutual funds provide
the much needed ease while investing in the equity asset class.
As it’s shown above that how equity mutual funds of different categories
like large cap, mid cap, small cap and diversified have given average return of
almost 23% over 5 years of span and on the other hand some stocks those mutual
fund have given return of less than 10% over five years or even some have given
negative returns also.
So this shows that how risky it could be investing in individual stocks in
comparison to investing through mutual fund.
Though mutual funds haven’t given much return over 3 years of span but they have
outperformed market over 5 years of span.
17
So according to me an individual should firstly decide the purpose of his or her
investment than they should select investment plan according to it like if they want
to go for short term investment of 1 or 2 years than they should go for some debt
instrument or if they have long horizon for investment and they are looking to
invest in equity market than rather than investing directly in some selected equities
they should go for some top mutual fund schemes as investing directly in stock
involves high risk and one may lose his or her money or may get small return and
if they will choose the mutual fund scheme than they may get high return over five
years of span.
As return of some stocks have outperformed badly the return of the mutual fund
schemes like some have given return of 400% to 500% but investor cannot be
always sure that will get opportunity to pick such stocks as some have given
negative return to. So to be on safe side and one should intelligently go for mutual
fund scheme.
18
REFERENCES
www.moneycontrol.com
www.rbi.co
www.businesstimes.com
www.economicstimes.com
19
MUTUAL FUND INVESTMENT ROUTE IS SAFER
WAY OF INVESTMENT IN EQUITY SHARES
THAN DIRECT INVESTMENT IN STOCK
MARKET FOR RETAIL INVESTOR.
F.M.S. PROJECT
TO, Mr.P.K.SRIVASTAVA
12/19/2013
REPORT BY GROUP 1PRAKRITI FS40
PANKAJ KUMAR SINGH FS34
PARITOSH SINGH FS35
ROMANSHU VARSHNEY FS64
RAJNEESH SHARMA FS44
Table of Contents
ACKNOWLEDGEMENT ................................................................................................................................... 4
MEANING ............................................................................................................................................ 5
A.
B. HERE ARE SOME OF THE ADVANTAGES WHICH MUTUAL FUNDS’ PROVIDES ITS
INVESTORS’ VIS-À-VIS THE DIRECT ROUTE TO EQUITY INVESTMENTS: ................................. 5
I.
Diversification................................................................................................................................... 5
II.
Professional Management ................................................................................................................. 6
III.
Lower Entry Level ........................................................................................................................ 6
IV.
Economies Of Scale ...................................................................................................................... 6
Innovative Plans For Unit-Holders ................................................................................................... 6
V.
VI.
Liquidity........................................................................................................................................ 7
VII.
Minimizes Loss ............................................................................................................................. 7
C.
INVESTING IN EQUITIES HAS A RISK-REWARD ASSOCIATION WITH IT. ................................................ 7
D.
CONSIDERATION FOR INVESTMENT IN EQUITIES: .................................................................. 8
E.
Determine Your Risk Taking Capacity:............................................................................................ 8
Align Investments To Overall Financial Plan: .................................................................................. 8
DIRECT INVESTMENT VERSUS INVESTMENTS THROUGH MUTUAL FUNDS .................. 9
F. COMPARISION OF TOP THREE MUTUAL FUND OF DIFFERENT EQUITY SECTORS VS DIRECT EQUITY
INVESTMENT. ................................................................................................................................................ 9
G.
1)
Fund Name- ICICI Prudential Mutual Fund ................................................................................... 9
2)
Fund Name- Birla Sun Life Mutual Fund .................................................................................... 12
3)
Fund Family- UTI Mutual Fund .................................................................................................... 14
CONCLUSION:...................................................................................................................................... 17
1
TABLE OF TABLE
Table 1......................................................................................................................................................... 10
Table 2......................................................................................................................................................... 12
Table 3......................................................................................................................................................... 15
2
TABLE OF FIGURE
Figure 1 ....................................................................................................................................................... 10
Figure 2 ....................................................................................................................................................... 11
Figure 3 ....................................................................................................................................................... 11
Figure 4 ....................................................................................................................................................... 12
Figure 5 ....................................................................................................................................................... 13
Figure 6 ....................................................................................................................................................... 14
Figure 7 ....................................................................................................................................................... 15
Figure 8 ....................................................................................................................................................... 16
Figure 9 ....................................................................................................................................................... 16
3
ACKNOWLEDGEMENT
We would like to express our special thanks of
gratitude to my sirMr.P.K.SRIVASTAVAwho gave
us the golden opportunity to do this wonderful
project on the topic“Mutual Fund Investment Route
Is Safer Way of Investment in Equity Shares than
Direct Investment in Stock Market for Retail Investor.
Elaborate By Studying The Performance Of Top 3
Equity Mutual funds Over The Last 3 Year Period
Vis-A-Vis Performance Of Stock Market Index
During The Same Period”which also helped us in
doing a lot of research and we come to know about
so many new things. I am really thankful to you.
We are making this project not only for marks but
also to increase our knowledge …
Thanking you.
4
A. MEANING
Mutual funds are investment vehicles that pool money from many different
investors to increase their buying power and diversify their holdings. This
allows investors to add a substantial number of securities to their portfolio for a
much lower price than purchasing each security individually.
A mutual fund is set up in the form of a trust that has a Sponsor, Trustees, Asset
Management Company (AMC). The trust is established by a sponsor(s) who is like
a promoter of a company and the said Trust is registered with Securities and
Exchange Board of India (SEBI) as a Mutual Fund. The Trustees of the mutual
fund hold its property for the benefit of unit holders. An Asset Management
Company (AMC) approved by SEBI manages the fund by making investments in
various types of securities.
The trustees are vested with the power of superintendence and direction over the
AMC. They monitor the performance and compliance of SEBI regulations by the
mutual fund. The trustees are vested with the general power of superintendence
and direction over AMC. They manage the performance and compliance of SEBI
Regulations by the mutual fund.
B. HERE ARE SOME OF THE ADVANTAGES
WHICH MUTUAL FUNDS’ PROVIDES ITS
INVESTORS’ VIS-À-VIS THE DIRECT
ROUTE TO EQUITY INVESTMENTS:
I.
Diversification
Investing in stocks directly has one serious drawback - lack of
diversification. By putting all money in just a few stocks, the investor
subjects himself to considerable risk should even one of those stocks
decline.
On the other hand, a mutual fund scheme by investing in several stocks tries
to overcome the risk of investing in just 3-4 stocks. By holding say 20 to 30
stocks, the fund avoids the danger that one rotten apple will spoil the whole
portfolio. Mutual fund schemes own a couple of dozen to more than a
hundred stocks in their portfolio. A diversified portfolio can generally
5
hold its downside even if a few stocks fall dramatically. This helps in
containing the overall risks.
II.
Professional Management
No matter how sound an investment sense a stock investor may have, sooner
than later he will realize that active portfolio management requires
considerably more skill, not to mention a lot of time too. There is an ocean
of a difference between part-time stock-picking and full-time fund
management.
Now compare this to mutual fund investing; the mutual fund investor does
not have to track the prospects and potential of companies in the
portfolio. Mutual funds are managed by skilled professionals who
continuously monitor these companies and take decisions on whether to buy,
sell or hold a particular stock in the portfolio.
III.
Lower Entry Level
There are few quality stocks today an investor can enter into, with just Rs
3,000 – Rs 5,000. Investing in stocks can be an expensive affair. Sometimes
with as much as Rs 5,000 an investor can buy just a single stock.
The minimum investment in a mutual fund may be as low as Rs 500. This
implies that with just Rs 500, a mutual fund investor can take exposure in a
fund portfolio of 20-30 stocks. The entry barrier in mutual funds is low so as
to encourage investor participation.
IV.
Economies Of Scale
By buying a handful of stocks the stock investor loses out on economies of
scale. This tends to pull down the profitability of the portfolio. If the investor
buys/sells actively, the impact on profitability would be that much higher
due to the various charges involved.
Due to frequent purchases/sales, mutual funds incur proportionately lower
trading costs than individuals. Lower costs translate into significantly better
investment performance and returns to the investors.
V.
Innovative Plans For Unit-Holders
By investing in the stock market directly, the investor deprives himself of
various innovative plans that are offered by fund houses. Fund houses offer
automatic re-investment plans; systematic investment plans (SIPs),
systematic withdrawal plans, asset allocation plans, triggers, etc. These
6
features allow investors to enter/exit or switch from funds seamlessly and on
the whole facilitate investment ease significantly. This is something the
investor can never duplicate individually.
VI.
Liquidity
A stock investor may not always find the liquidity in a stock to his liking.
There could be days when the stock is hitting the up / down circuit and
buying/selling is curtailed. This does not allow him to enter / exit a stock.
Such liquidity problems are not confronted by a mutual fund
investor.Sometimes a mutual fund may be more liquid than other investment
avenues. For instance, there are days when there are no buyers or sellers for
an individual stock. But an open-ended fund can be bought / sold at that
day's NAV by simply approaching the fund house or its registrar or a
distributor.
VII.
Minimizes Loss
Investing in mutual funds assures more safety of investment than investing
directly in stocks. A company may shut shop or may go bankrupt and
according to the law, the equity shareholders are paid last, after paying all
dues to the creditors of the company.
A mutual fund may lose money, but may not go down as easily as a
company. The legal structure and stringent regulations that bind a mutual
fund safeguard a unit-holder's interests far better. As highlighted above,
investing in mutual funds has some unique benefits that the direct stock
investor would find it difficult to duplicate. By no means are we are stating
that mutual fund investing is a sure-shot way of logging growth. This can be
done even by investing directly in stocks. However, mutual funds offer the
investor a relatively safer and surer way of picking growth minus the hassle
and stress that has become synonymous with stocks over the years.
C. INVESTING IN EQUITIES HAS A RISK-REWARD
ASSOCIATION WITH IT.
Before we take the plunge, here are a few things you need to remember:
Investing in equities is highly risky, but at the same time, can get you
attractive returns over the long term. Direct investment in equities is possible
by purchasing shares of companies listed on stock exchanges. You can also
7
enter equities by investing in mutual funds, getting into portfolio
management schemes or playing through the derivatives market by taking
exposure to futures, options and structured products. With such a plethora of
options available, it is sometimes confusing as to what is the best mode of
entering the equity markets.
The mode of investing in equities depends on your risk tolerance and risk
aptitude, in addition to your goals and financial situation. Those with high
risk appetite would wish to invest directly in stocks or take an exposure to
derivative products. In these methods, although the returns would be high,
the risk is also very high, which may sometimes result in erosion of your
investment.
The risk-averse would prefer to enter equities by investing through mutual
funds. Here, although mutual funds mirror the stockmarket performance,
you may get slightly lower returns than if you would have invested directly
in high-return stocks.
As a long-term strategy, it is best to invest in mutual funds, especially if you
do not have the time and knowledge for direct stockmarket investing.
D. CONSIDERATION FOR INVESTMENT IN
EQUITIES:
Here are a few things you must consider when you invest in equities:
Determine Your Risk Taking Capacity:
As mentioned earlier, equity investments come with high risks. You may
sometimes even lose out on your initial investment amount. Hence, you must think
of getting into equities only if you are comfortable with the volatility associated
with stock markets, especially over the short term. Equity exposure should be
based on your goals, age and risk profile.
Align Investments To Overall Financial Plan:
The objective and duration of your investment are important determining factors.
Your investments should be aligned to your financial goals. Equity mutual funds
are best suited for long-term goals, with duration of over five years.
8
E. DIRECT INVESTMENT VERSUS
INVESTMENTS THROUGH MUTUAL
FUNDS
Under RGESS there is a limited flexibility in terms of investment. As per RGESS,
investments made in shares which are part of BSE-100 or CNX 100 index are only
eligible. Additionally listed shares of Navratna, Maharatna and Miniratna publicsector undertakings, and initial public offers (IPO) of PSUs, whose turnover is
more than Rs 4,000 crores, are also eligible for investment. If you decide to invest
through mutual funds, you end up paying costs which depend upon the slab and
can go as high as 3% of the corpus. This is definitely higher than the investment
expense that you will end up incurring. With brokerage charges nose-diving, the
cost of charges will be less than 3% for you. Additionally since the mutual funds
can invest in limited stocks, benefits arising from skills that mutual funds have will
get diluted. In the earlier version of equity linked tax savings scheme i.e. ELSS,
mutual funds could not perform exceptionally well. Since mutual funds will
redeem RGESS scheme after 3 years, there is limited time available to mutual
funds to perform, while as an individual investor you can stock for longer period in
the investment. Mutual funds offer one advantage over direct investment since
mutual funds are allowed to churn portfolio which individual investors are not
allowed for a year under RGESS. Of course, other conventional advantages of
investment through mutual fund stay. Since investors in RGESS will be first time
investors, it will be better to start investments through mutual funds in spite of all
shortcomings that mutual funds have.
F. COMPARISION OF TOP THREE MUTUAL FUND
OF DIFFERENTEQUITY SECTORS VS DIRECT
EQUITY INVESTMENT.
1) Fund Name- ICICI Prudential Mutual Fund
Fund Class- Large Cap
9
Comparison of return of this fund and Nifty over 5 years
Figure 1
Fund Return over five years
Table 1
1 year (%)
12.3
2 year (%)
19.8
3 year (%)
7.3
5 year (%)
20.3
Comparison of return of this MF with some of its holding
10
Bharti Airtel return over 5 years
Figure 2
Price on 13th of April 2009 is 337
Price on 6th of December 2013 is 331
So its return over 5 years of Airtel is -1.8%
Reliance Industries return over 5 years
Figure 3
Price on 6th of April 2009 is 836
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Price on 13th of December 2013 is 860
So its return over 5 years is 2.87%
Here return of Large cap equity mutual fund is 20% over five years but
stocks have given poor return over 5 years of span.
2) Fund Name- Birla Sun Life Mutual Fund
Fund Class- Small & Mid Cap
Comparison of return of this fund and Nifty over 5 years
Figure 4
Fund Return over five years
Table 2
1 year (%)
7.1
2 year (%)
20.2
3 year (%)
9.2
5 year (%)
27.8
Comparison of return of this MF with some of its holding
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Jain Irrigation Systems return over 5 years
Figure 5
Price on 4th of February 2009 is 65
Price on 10th of December 2013 is 70
So its return over 5 years is 7.6%
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Fulford (India) returns over 5 years
Figure 6
Price on 27th of April 2009 is 480
Price on 10th of December 2013 is 615
So its return over 5 years is 28.12%
Here return of mid and Small cap equity mutual fund is 28% over five
years but some stocks have given poor return while some have given
good return over 5 years of span.
3) Fund Family- UTI Mutual Fund
FUND CLASS Diversified Equity
Comparison of return of this fund and Nifty over 5 years
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Figure 7
Fund Return over five years
Table 3
1 year (%)
2 year (%)
3 year (%)
5 year (%)
7.7
18.8
10.6
24.8
Comparison of return of this MF with some of its holding
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Ashok Leyland returns over 5 years
Figure 8
Price on 8th April 2009 is 10
Price on 10th December is 16
So return of this stock is 6%
Suzlon Energy return over 5 years
Figure 9
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Price on 17th April 2009 is 58.
Price on 13th December 2013 is 9.
So return of this stock is -84%.
Here return of Diversified equity mutual fund is 25% over five years but stocks
have given poor return over 5 years of span.
G.
CONCLUSION:
Investments may be in direct equities or mutual funds require a lot of time and
energy. Each approach has its own advantages and disadvantages. Direct equity
investing is considered more dynamic by the investor community and thus, those
who can keep a continuous tab on the equity markets prefer the direct equity route
as it gives them much needed zing and excitement. However, the dynamism in the
direct equity investment comes with risk. Hence, only those investors who are able
to understand the nitty-gritty of the equity markets and who are able to devote time
and energy can adopt this route to equity
But not all investors are same in their intelligence and understanding levels. And
even if someone has the ability to understand the direct equity route, he or she
lacks the time to devote to such investment activity and thus prefer taking the
indirect route to equity investments which is mutual funds. Mutual funds provide
the much needed ease while investing in the equity asset class.
As it’s shown above that how equity mutual funds of different categories
like large cap, mid cap, small cap and diversified have given average return of
almost 23% over 5 years of span and on the other hand some stocks those mutual
fund have given return of less than 10% over five years or even some have given
negative returns also.
So this shows that how risky it could be investing in individual stocks in
comparison to investing through mutual fund.
Though mutual funds haven’t given much return over 3 years of span but they have
outperformed market over 5 years of span.
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So according to me an individual should firstly decide the purpose of his or her
investment than they should select investment plan according to it like if they want
to go for short term investment of 1 or 2 years than they should go for some debt
instrument or if they have long horizon for investment and they are looking to
invest in equity market than rather than investing directly in some selected equities
they should go for some top mutual fund schemes as investing directly in stock
involves high risk and one may lose his or her money or may get small return and
if they will choose the mutual fund scheme than they may get high return over five
years of span.
As return of some stocks have outperformed badly the return of the mutual fund
schemes like some have given return of 400% to 500% but investor cannot be
always sure that will get opportunity to pick such stocks as some have given
negative return to. So to be on safe side and one should intelligently go for mutual
fund scheme.
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REFERENCES
www.moneycontrol.com
www.rbi.co
www.businesstimes.com
www.economicstimes.com
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