5 difference between stock & mutual funds Investing

When we say Equity, what comes to your mind – Stock or Equity Mutual Fund? While a single stock or a mutual fund both comes under the category of Equity and they are good option for long-term investmentand needs periodic review. There are some differences between stock investing and mutual fund investing that is done by a common man. It’s a good idea to know where they differ and in which situation they differ, so that one can take better investing decisions. Let’s look at the main differences

Volatility

When you invest in a single stock or bunch of stocks (3-5 scrips), the change in it’s value is very high. On a given day it can be extremely volatile. It can give you 20% return and sometimes -10% loss also depending on the environment. This can be very exciting and at the same time very disheartening and gives you a feeling that you need to “act fast”. 

Mutual fund on the other hand is not that much volatile by nature, as the diversification is very large and at a time 50-100 stocks are covered. Different kinds of stocks from different sectors and market capitalization are involved in mutual fund and the over all change in value is thus less volatile (other than extreme days).

Return Potential

This is very much in line with the above point but still let’s look at it separately. There are lot of success stories where someone got quick rich by investing in equities directly and it can happen, but those are rare happenings and require lot of work and analysis, patience and belief in what you have picked. If you want superb returns in short time and you believe you can research well, you can go for stock investing directly but then risk is also more.

Mutual funds are known to deliver good returns (not in line with stocks, but still very good). So you can expect handsome returns from mutual funds but not unbelievable like stocks return. This is mainly because the money is diversified across different stocks (read ideas) and chances of all of them becoming a super success in short time is impossible.

Monitoring Required

Stock investing is a personal affair and you are doing it on your own the decision of what to sell and what to buy is on you. Even in case of long-term investing, you might have to keep an eye every quarter or yearly unless you have really spent some good time in picking the good stock. You need to also keep an eye on news and sector specific developments.

Monitoring in mutual funds is relatively low because the job of monitoring is anyways done by the fund manager who is paid SALARY to filter through the fluctuations. He constantly adds and removes the stocks from the portfolio. This can be a positive point, but sometimes it can be a negative point also if there is too much of churning.

SIP Investment

Mutual funds are known for possibility of SIP (monthly investment). SIP in mutual fund works and is recommended as a great way for a salaried person to invest in equity markets for long-term basis without understanding the working of equity markets.

However SIP in stocks do not work. Yes, some companies provide you the facility of SIP in stocks, but it’s a terrible concept. There is no diversification and SIP in a particular stock does not make sense because the risk is with single stock. A stock can be in a bad phase for years and decades, whereas in a mutual fund the bad performing stock is weeded out.

Asset Class Restriction

Stocks investing is restricted to Stocks only. You can choose a large cap stock, mid cap stock or small cap stock, but finally it will be equity asset class. However, mutual funds can invest in mix of asset classes. There are equity funds, debt funds, gold funds, Mix of Equity and debt also. To top up, even balanced funds are there which can adjust the asset allocation on its own, so in a way mutual funds are more superior in terms of features compared to a single or bunch or stocks.

Conclusion

Mutual Funds are actually collection of stocks only but just because it’s a group of stocks the characteristics are not very similar to that of stocks. You should be clear about all the points of difference and only after that you should decide whether to invest in Stocks directly or take the Mutual Fund route.

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Income is not Wealth

Let me ask you a question. Ajay earns Rs 1 lac per month, and his friend Robert earns Rs 40,000 per month. Who is more rich and in better position ?

In all probabilities most of the people would say Ajay because he earns more than Robert and that too 2.5 times of Robert’s salary. However you can’t give the judgement so fast, because we have not mentioned how much are their expenses, or in other words how much money they burn at the end of the month and what is amount is actually saved. What if Ajay’s expenses are Rs 90,000 and Robert’s expenses are Rs 20,000? In that case Robert would be saving 20,000 per month and his rich friend Ajay would be saving just Rs 10,000 per month. Right ?

What matters is Savings, not Income

So you can see that the real thing that matters is the money saved!, not earned. However more income helps in more savings at the end, but its not true always!. The real wealth gets created by your savings and not just by earning big!. So, if you are earning a lot and saving a lot of it parallely each month then you are in a good position. But if you are earning a lot, but spending a LOT too, then in reality you are no better than someone who is earning less and saving less. In that case, from the future aspect, wealth creation will either be too low or it just won’t happen.

Lots of people who have big incomes are actually not very good at saving money – they’re used to having plenty of money coming in, so they don’t pay enough attention to the money going out.

For example – If you and your friend both are saving Rs 20,000 per month and in long run, it’s going to continue that way, it really make no difference for how much you both really earn, because in the long-term, your wealth creation is the function of how much you save and how much of it you actually invest properly.

So this boils down to one big question – “Are you just rich by your Income or are you really rich by savings?”.

A lot of people earn very high salaries, but they end up spending most of it. You can blame this to high standard of life style, high status symbol and all sort of expenses, but your real worth is what you save at the end. I know one friend personally who is a bachelor and he makes around 1 lac per month, but spends 70,000 per month and I know one more friend who earns 70,000 and spends 20,000 per month. Though the first one earns more than the later one, the wealth creation is happening pretty fast for the second guy, even though he is earning lower than the other friend.

Now the question is – How much of your income do you save?. By Saving, I mean any kind of savings which is left with you at the end of the month after expenses + the investments you do in different places (because even that’s part of saving only).

Whats your Saving Ratio?

A good indicator to know is finding a simple ratio called “Savings Ratio”. Just divide your savings at the end of the month by your income and that’s your saving ratio? How much is it? Is it 20%, is it 30% or is it 75%. How much is it?

Lets see an example . Say Ajay makes Rs 50,000 a month and he pays rent of Rs 10,000 , pays another 12,000 in home related expenses, spends another 6,000 in entertainment and outings and at the end of the month is left with Rs 22,000 , thats Rs 22,000 saved with income of Rs 50,000 – which is 44% saving ratio . You can do it on monthly or yearly basis , but put some numbers on table and do this important calculation.

I would personally say that a saving ratio of more than 40% is a good enough number. But if its below 20%, you should really do something about it. So what are your plans about increasing your saving ratio from this point onward? What are your thoughts about this concept of Income Rich and Savings Rich ?

Does Home Loan kills Enterpreunership ? May be YES

Who doesn’t want to start some venture of their own? Majority of the people are in jobs and a big number of people do not like what they do. If they had a choice, they would really run away in this very moment. But our responsibilities in life and the situation we create for ourselves makes sure that we are stuck and can not get out of the rat race. We see so many people who want to work in start-ups, many people who really want to do something which they really love and enjoy even if it does not pay a lot but it’s not possible for lot of people to simply quit and start something of their own. Today we are discussing if home loans are a big killer of entrepreneurship which lot of Indian’s have in them? 

We all know flipkart.com – One of the co-founder of the company, Binny Bansal made an interesting comment that – Home loan kills entrepreneurship.

India is definitely happening and there are a lot of opportunities in different fields. If you are thinking of starting up, this is the best time. But don’t take a home loan,that actually kills entrepreneurship. You can never get out of it. - Binny Bansal , co-founder flipkart.com (via)

Home loan is a big commitment, especially in a family where there is one earning member. People take jobs, get married, get a home loan, car loan etc, have kids in between and life becomes so “formula driven”. Income has to be earned and expenses have to be taken care. Risk of job loss, income loss due to medical emergencies and similar kind of risks are on the minds of a people who are paying for home loan – and this pressure kills the dreams of doing something of his own and the natural thinking then becomes – “Not an issue – Let me earn for next X years and once I retire, I will live all my dreams”. I am not sure if it really works at the end or not.

There can’t be a bigger liability than owning a house on Loan

Santosh Navlani of moneysights.com confirm’s in one of this comments, that saw same kind of thing while he was hiring people.

I am an entrepreneur & meet many people who at times are potential employees for my start-up venture. Now, most of these house-owners even if they are “excited & thrilled”, don’t join a start-up which would offer them great earning potential in the future because of the uncertainties that a start-up job brings to their income. Simply because they have a huge liability!

If one factors the cost of “forgoing” the pursuit dreams, I guess there can’t be a bigger liability than owning a house on loan. I have seen people getting stuck in wrong jobs where they sacrifice their long-term future by satisfying the urge of saving the rent. And yes, you don’t decide to pursue a dream of start-up or a job-switch by thinking extremely hard on it. It just happens that you are not able to take the job anymore. The last thing one wants then is fear of home-loan coming in way.

So what you do if you are young enough, unmarried and want to taste entrepreneurship? This is the right time to take the plunge and take the risk, so that you have that cushion to come back in the game if you fail. Once you take a home loan and are married, life is full of commitments and you will not be excited enough to start something on your own or join a more fun (low paying – at least in starting years) job. One of the friend who didn’t want to reveal his identity shared with me on facebook.

When I was 25, working as a software engineer at Hexaware Mumbai in 2002, earning Rs. 25,000 per month, I quit my job and went to Goa, following my dream and started a completely new career stream at an income of Rs 4,000 p.m. At that time, I was single, did not have any home loan or other commitments and that certainly helped otherwise I may not have been able to take that jump.

Interestingly, when I met a few ex-colleagues from software industry recently, to my surprise, I figured that not only I earn more or equal to them, but am also much happier because I am enjoying what I’m doing. They confessed to not enjoying their jobs and feel that as software professionals working late nights to meet client calls in US, long daily commute to office etc. they felt as though 10 years of their personal life was “sucked” by their jobs.

Conclusion

There is saying – “If there is a will, there is a way” and a lot of people I talked about on this topic, said that if a person has the guts, vision and passion, he can make it real, even if he has huge debt!. But we are talking about the masses here (majority of people) and for most of the people it’s really difficult to take that kind of risk, even thought they have huge passion and mindset- their situation just does not ALLOW IT. Do you really agree to it ?

Would you like to share about your experience and thoughts on this topic ? Do you really think that home loan (or any such kind of huge responsibility) really kills entrepreneurs and stops people to explore low paying but hugely satisfying careers ? Really ?

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4 reasons to invest in GOLD

There are many reasons why we shall look beyond conventional Fixed Deposits , PPF and high growth Shares and Mutual Funds. Gold is always seen as a thing to own and only for consuming as ornaments , for jewellery but seldom as an investment purpose , in fact silver also for that matter.

But now there are many reasons to invest in GOLD , just like people invest in Shares , Mutual funds ,PPF , NSC and Fixed Deposits.

Reason 1: Stock Markets are becoming risky and uncertain

Stock Markets are in Bad shape for atleast short or medium term atleast. No one knows whats going to happen in 6 months or 1 year or 2 year. Long term may be good but still medium term perspective is not very clear.

Not only Stock Market , but whole of financial Markets are uncertain , if you consider problems like Inflation , dip in projected GDP growth of economy etc .

Reason 2 : It acts like hedge towards Inflation and Foreign currency

As Indian currency is gaining against Dollar and other currencies , Rupees is set to become more strong in coming years. Gold has inverse relation with Dollar.

http://news.goldseek.com/SpeculativeInvestor/1171382460.php

In future as Dollar weakens , GOLD will become more strong.

Reason 3 : Its a relatively less known investment option and has high potential in future

Looking at history , and every time we see that a investment option starts becoming popular and by the time most people know about it , it already gives most of its returns and becomes a talk of past.

GOLD has started gaining attention as investment option and becoming popular and still in its middle stage , if not early.

So its the time to ride the boat.

Reason 4 : Future High Demand and less supply

In future gold is going to in high demand and its already in less supply , so according to the demand-supply logic the prices are bound to go up in near future. Indians account for 23% of world’s total annual consumption and overall global demand has increased 15% Year on year

Gold demands were on all time high in 2007 and expected to increase in coming years due to mismatch in demand and supply.

Reason 5 : More Diversification 

Before some time back , diversification of portfolio was limited to Equity , Debt and Real Estate and some cash , so that your risk is spread across different class of assets. GOLD has evolved as another asset class and not it help in diversifying your portfolio.
Whats the Best way to invest in GOLD ?
It really depends on person and situation and the motive of investment.

One can invest in GOLD directly by buying gold in physical form like jewellery , gold biscuits , gold bars. It all of these require some maintenance and some problems are associated with investing in physical format like :

- No surety of purity , you can be sure that you got the same purity as promised
- Preserving cost : if you have physical gold , you will invest in bank locker etc
for secure storage.
- Risk of theft , mishandling etc

To avoid all these problems , we have an alternate way of investing in GOLD , called Gold ETF’s , read it next …


What are GOLD ETF’s
Gold ETF’s are special type of ETF’s (Exchange traded funds) , ETF are not covered here , but view them as open ended mutual funds , which are traded on stock exchange just like normal stocks. You can buy units on Stock Exchange , each unit is equivalent to one gram of gold or .5 grams of gold.

So if you want to invest in 100 grams of gold , you can buy 100 units of a GOLD ETF from stock exchange , you can buy it just like any share from stock exchange.

gold ETF’s price changes real time , as they are traded on stock exchange like shares.

In India currently there are Five Gold ETF’s.

- Benchmark Gold ETF (Stock Code on NSE/BSE : GOLDEX ) (the first one in country)
- UTI Gold ETF (Stock Code on NSE/BSE : UTGOLD )

and other 3 from Reliance , Quantum and Kotak listed on NSE.

Gold has returned 38% in last 1 year and 170% in last 5 years (absolute). And it looks great in future.

You can easily enter and exit from GOLD ETF’s unlike physical gold.

How investing in Gold ETF’s scores over Physical gold like Bars or jewellery ?

Comparison of GOLD ETF’s vs GOLD BARS vs Jewellery

Consider you are investing Rs 1 Lacs in Gold , there are 4 parameters to judge.

If you purchase Them
- Jewellery : Making charges of 15-20%
- Gold Bar : 10% to 20% mark up charges by banks.
- Gold ETF: 1.5-2.5% entry load
If you Sell

- Jewellery : 10% – 20% is lost due to Purity issues- Gold Bar : Banks do not take it back , so premium paid at time of purchase is written off.- Gold ETF : Brokerage of 1% or even less

Maintenance Charges

- Jewellery : Insurance charges and locker charges (if you put it in locker)
- Gold Bar : Insurance charges and locker charges (if you put it in locker)
- Gold ETF : 1.5 – 2.5 %

Tax Implications

- Jewellery : Long term capital gain of 20% , but after 3 years. 1% wealth tax
- Gold Bar : Long term capital gain of 20% , but after 3 years. 1% wealth tax
- Gold ETF : Long term Capital tax of 20% , but after 1 year. No wealth tax
Note : Gold is taxed at 30% if held for less than 1 year in any format.
So on all these 4 scenarios , GOLD ETF’s score heavily over other means of investing in GOLD.
Read about Gold Funds , another article on Gold Investing , Click Here

To read more on why gold is a must buy now and how silver is much better than gold , readhttp://silverstockreport.com/


I would be happy to read your comments or disagreement on any topic. Please leave a comment.

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Diversified equity funds

	10-year return (%)	SIP return (%)
Franklin India [ Images ] Prima	22.16	35.78
HDFC [ Get Quote ] Equity	23.76	33.22
Franklin India Bluechip	24.21	31.43
Franklin India Prima Plus	22.99	30.22
Birla Advantage	23.79	26.16
HDFC Capital Builder	15.43	24.54
Prudential ICICI [ Get Quote ] Power	15.02	23.80
Magnum Global	13.53	22.98
Tata Growth	10.02	22.71
Canexpo	15.77	21.90
Morgan Stanley Growth	16.22	20.35
Taurus Starshare	8.67	19.93
GIC Fortune '94	7.89	18.16
UTI Master Growth	11.78	17.40
GIC Growth Plus II	12.46	17.14
Magnum Multiplier Plus	10.16	16.87
UTI Grandmaster	9.47	16.87
Magnum Equity	11.68	16.60
Taurus Discovery Stock	2.67	16.26
Unit Scheme '92	10.61	15.84
UTI Equity	8.63	15.56
J M Equity	8.11	14.81
UTI Master Plus '91	9.23	14.32
Principal Equity	8.43	14.20
UTI Mastershare	8.11	13.20
LICMF Growth	-2.08	10.35
LIC [ Get Quote ] MF Equity	1.70	9.25

Equity Linked Saving Schemes

	10-year return (%)	SIP return (%)
Magnum Taxgain	20.28	29.29
Canequity-Tax Saver	9.84	13.03

Balanced funds

	10-year return (%)	SIP return (%)
Alliance '95	28.18	29.38
HDFC Prudence	22.95	28.17
UTI Balanced	21.19	22.24
J M Balanced	15.04	18.13
GIC Balanced	8.03	12.61

As can be seen from the performance figures, the SIP has delivered better returns than a lump-sum investment.

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