Discipline is the Key to Success in Stock Market

Mutual funds have become one of the most famous tools of financial investment in the stock market. It is true from the beginner’s perspective, as through mutual funds, they do not have to worry about stock selection, entry, and exit time of stock. However, when someone intends to invest from the long-term perspective, they must be aware of the hidden charges (such as maintenance charges) applied on mutual fund portfolios. These hidden charges might eat up a large chunk of the overall long-term portfolio returns.

In general, certain hidden charges are ranging from 1.5-3 per cent (depending upon the mutual fund) applied to every mutual fund, which is adjusted from actual returns accrued. How much impact these changes have on your portfolio? Let us understand this from one example.

Let us suppose that you have to invest Rs one lakh for 20 years. Hypothetically, suppose your investments assure a return of 1 per cent per month. If there are no handling charges applied on your investment, your portfolio valuation will become approximately Rs 10.90 Lakh in 20 years. On the flip side, which is the real case, if the MF manager is applying a 2.5 per cent annual fee on the mutual funds, the final amount accrued will remain only Rs 6.63 lakh. This is a huge difference.

As you can observe, there is a clear loss of Rs 4.27 lakh on an investment of just Rs 1 lakh.

There comes the million-dollar question. Instead of investing through the mutual fund route, why can't you  go for direct stock investment? Let us understand the challenges involved and the way ahead.

Stock selection

The most important aspect of investing directly into the stock market is the selection of return-worthy shares. When it comes to stock selection, we have so many sources of advice such as friends, newspapers, online media, TV. Sometimes, it becomes difficult to make a selection from so many pieces of advice. Moreover, one wrong piece of advice might have a huge negative impact on the overall portfolio. This might be for the very purpose of investment in the share market.

On the other side, mutual funds are managed by highly qualified professionals fund managers, and industry experts. Here, the investor does not have to worry about the selection shares of good companies.

I suggest that there are two options available for the stock investors. First, they can search for the top 10/20/30 companies of Nifty 50/Sensex and invest in them directly, but this method suits the people who want to invest a lump sum amount of at least Rs 5 lakh 10 Lakh or more.

If you want to invest every month similar to the mutual fund Systematic Investment Plan (SIP), then it is better to go for the Nifty 50 Exchange Traded Fund (ETF), where you can invest an amount as low as Rs 100. ETFs provide you with an opportunity to invest a small amount and get returns of all Nifty 50 shares combined. Moreover, the management fee in the ETF is 10 percent which is very low as compared to the mutual funds. Nifty 50 ETF shares and their weightage is almost the same as Nifty 50, so you get the almost same return as Nifty 50. If the benchmark performance of all the large-cap mutual funds is compared with Nifty 50, more than 50 percent of mutual funds will not be able to beat Nifty 50 returns. You do not need to worry about returns in the long term because returns from Nifty 50 are considered as ‘Share Market Return’ in the long term.

Discipline in Investing 

This is the second most common issue faced by direct investors. Discipline is the key to success in the stock market. Sometimes, people become lazy and postpone the decision to the next month, and this procrastination costs them dearly. In addition to this, the investors wait for the perfect timing. They keep deferring their investment decision by thinking that this is not the right time to invest, as the stock market is too high or fluctuating daily.

The best part of mutual funds investment is that funds are automatically deducted from the investors’ bank account, and you do not have to make a decision every month.

In addition to this, when you observe that one of your selected shares is not performing as per your expectations or has outperformed, you have the power to exit from it immediately. People keep on churning and selecting the shares as per their expertise; hence it becomes very difficult to get actual returns from the market which they might have obtained.

I suggest that some brokers provide a SEP (Systematic Equity Plan) method to invest every month with a fixed amount in the shares of the client's choice. This way, they can invest in shares directly, coupled with the discipline of Mutual Funds. For the second issue, I suggest that it is always better to invest in Nifty 50 shares directly or through the ETF route, and be strict with it, as it is very difficult for a common man to beat the Nifty 50 performance. Therefore, you do not have to put your brain on share selection and entry or exit time.

The author is Vice-Chairman of GCL Securities Limited

DISCLAIMER: Views expressed are the author's own. Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.