MF vs DE

Today, we have an interesting article which explains the working of a mutual fund and how it is better or worse than direct equity investment. Since most of the publications rally behind mutual funds and there is susbtanial money spent by funds on marketing, it is hard to find an article on the actual functioning of mutual fund & comparison of it with direct equity investment. We will present both the pros & cons and then it is up to you to pick one or blend both in your portfolio.

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Is it possible to create an investment which pays me for lifelong & beyond?  This is a question every investor must have asked himself at some point in time. What if you are told that it is very much possible. There is solid mathematical certainty behind it. Last 30 years of market statistics are also supporting us. You can create such investment & enjoy lifelong earnings. The best part, you can even pass this to future generations as your legacy.

Next question will be why it is not known till date? Well, everyone who has a basic understanding of equities, knows but not realizes because of certain predispositions of financial industry. I highly encourage you to read this article entirely. This can be one of the life changing articles, you will ever come across on Internet.

new lot.pngTo achieve high returns from a well diversified portfolio, shall I invest in lot of stocks to find some multibaggers or shall I restrict to fewer stocks. We are sure this question must have come to your mind when you started investment in equities. In the famous report published by J. Evans and S.H. Archer in 1968, they advised to have 20 to 30 stocks. While a recent study released in 2014 by Vitali Alexeev and Francis Tapon, advises 90 to 110 stocks. There are no right or wrong answers and researchers are divided between 20 stocks to 200 stocks. We at AI, believe that it entirely depends upon your investment style & preference but even then, there are certain rules to follow. Let’s find out in detail.

Recently, DSPBR Micro Cap fund restricted fresh purchase or SIP. It created a lot of inconvenience to people who were planning to start new SIP or a lumpsum investment. It was followed by Mirae Asset Emerging fund also to restrict fresh purchase. We believe more small cap funds can join them in restricting fresh fund inflows. The reason fund managers are giving is that they can not find stocks to park fresh inflows.

But why is that so? Let’s try to understand.

Lets say DSP BR Micro cap has 5,800 cr as on today. If average small cap stock has a market capital of 500 cr. In that case, if fund has to deploy even 1% of their cash into a stock, they will end up buying 58 cr worth of stocks and result in owning more than 10% of that company. Also it is not practical to buy 10% shares in less liquid stocks simply because there are not enough shares on the exchange.

Another logic given by investor is that they can invest in more stocks and own lesser percentage in those stocks? This is also not possible since if they start doing it, they will end up buying all kinds of stocks which they do not want to do. Also managing so many stocks is an added burden on fund performance.

This is the same reason why Warren Buffet says he finds Indian markets less liquid to park his money. Since his slice of investment converted into indian rupees is till too much for even large caps indian stocks.

So what do small cap investors do now?