For every individual wishing to invest, the problem is deciding between many options. There is a lot of “noise” in practically every investing route, and recent developments have the power to quickly change investor and market sentiment. Today it may be gold, tomorrow it might be equity. Here is where one has to exercise caution.
The returns on different instruments during the first half of 2024–2025 and the equivalent returns over the previous ten years, ending in 2023–2024, are displayed in the table below. Since the returns scenario for six months cannot be assumed to hold in the future, the comparison between six months and ten years is done here to give a notion of historical trends.
| Investment product | Ten-year average return | Six month return (H1 2024-25) |
| NSE Nifty | 15.3% | 15.6% |
| Gold | 4.6% | 19.0% |
| Silver | 2.1% | 22.9% |
| Crude oil | 2.5% | -12.8% |
| 1-year Bank Fixed deposit | 6.6% | 6.6% |
| 10-year G-Sec | 7.1% | 7.0% |
| 6-month T-bill | 6.8% | 7.1% |
The reader will see that, based on the NSE’s Nifty index, the stock market is likely to provide a 15% return on investment; not only over the six months, but also for the previous ten years. This pattern is consistent with the generalization about equities markets is that – “one must remain invested for a long time in order to see gains in equity”. In the long run, stocks have performed admirably.
So, equity is the clear winner here, and hence we as investors decide to invest in equities. But now comes the most important question –
“Should we invest in direct stocks or in equity mutual funds?”
For those who made wise investment decisions and were a little lucky, the Indian stock market gods have been benevolent—and occasionally extremely so in recent years, yielding remarkable returns. It should come as no surprise that a lot of people have noticed this and started investing in direct stocks. There is an apparent pattern when one looks at the total number of demat accounts being opened.
My cousin recently told that he has switched his whole portfolio to direct stocks as he can now easily create higher returns with stock investing (than mutual funds). Although he began investing in mutual funds over ten years ago, he just began investing in direct equities two or three years ago, during the post-covid boom.
Therefore, it is clear that his recency bias led him to act in the same way as many others who are now adopting direct stocks seriously and in large amounts.
Having said that, is it wise to invest only in equities rather than mutual funds?
People’s opinions on this are strongly influenced by their personal experiences. To be honest, there isn’t a single solution that works for everyone. Direct stock investing offers greater control over the creation of a targeted portfolio that can aim to outperform markets and/or provide larger returns than mutual funds. But as someone with considerable experience in investing knows, it’s easier said than done.
Direct stocks have the potential to yield larger profits, but there are also risks involved. The reasoning behind this is that your whole portfolio may suffer significantly if a small number of your concentrated portfolio’s stock selections begin to perform poorly. This is already known by seasoned investors who have witnessed a few market cycles. However, people who have only recently entered the stock market and have witnessed only its ascent may not comprehend this or know how to handle a declining or bear market.
Majority of investors should base their equity allocation primarily on mutual funds. There is a high possibility of achieving satisfactory return outcomes from a well-managed portfolio that includes a good mix of active and passive mutual funds. This does not seem reasonable given that our rising markets have made it appear simple to profit from direct stocks.
Most consumers lack the time and expertise necessary to thoroughly analyse the companies that underpin the stocks. Selecting a few high-quality stocks is one thing. However, creating a properly allocated, well-diversified portfolio of several equities and then continuously producing returns over time (like mutual funds do) is a very different challenge.
As said above, majority of us lack the time and expertise to analyse the company behind the stocks. You can disregard the remainder of this post if you are an experienced direct stock investor with years of solid expertise. However, if you aren’t and are feeling more and more pressured to invest substantially in direct equities at the expense of mutual funds, please keep reading the below section as well, which is crucial to understand equity investing.
Equity Investing:
Continue to invest in equities mutual funds or exchange-traded funds (ETFs) for your core equity allocation. What is the appropriate amount to allocate? The answer is 80% or more. Selecting a few schemes from several fund categories that will enable you to adequately diversify across various market cap segments, such as large-cap, mid-cap, and small-cap, is not difficult. If you are risk cautious while investing in market cap segments or if you are unaware of how to select specific category funds, you may also consider passive products like index funds or exchange-traded funds (ETFs).
You might begin with a small allocation if you still wish to invest in direct equities, but only after the core equity mutual fund portfolio has been built. It matters how you choose your investments. Please refrain from making rash investments based on advice from friends or social media. That will ultimately fail.
Your actual investing experience, your interest, capacity for devoting time to researching certain companies and industries, etc., will all influence how much you should invest in direct stocks.
It will become evident after a few years whether your mutual funds or direct stocks are performing effectively. Perhaps this evaluation phase should also involve time spent in weak or declining markets as well. This is due to the fact that every genuine investor is put to the test during these times of bear markets or sometimes even during sideways markets.
