Personal Finance Solutions for India

How Would You Like to Gamble- With Stocks or Mutual Funds?
Sukamal Bhattacharya

Defined Tag: Mutual Fund Investing.

All day the mega TV commercials for stockbrokers and investment plans tend to leave out the one word that best describes what they are really doing. It's called gambling.

After all, life is a gamble. There's nothing wrong with gambling, as long as you realize that that's what you're doing. When it comes to gambling with your money, what you want to do is get the best odds you can get.

When we buy stocks on our own, we are creating our own stock portfolio. We are gambling with our own money all by ourselves.

But when you buy mutual funds, you are buying a share in a professional portfolio manager's stock portfolio. You and your money are backing a professional gambler.

It translates into more security and protection.

When you buy stock in a company and that company does well, you make money. If it doesn't do well, you lose money. But by buying into a mutual fund you're buying into a group of stocks. Some mutual funds may have 10 different stocks. Some might have 100. What that does is give you some diversification and protection. When one of the stocks in the fund goes down, it's only a percentage of the total holdings. You can still see a net gain.

When you buy individual stocks you are taking a very big risk. No one can tell you for certain if it is going up or down.

The stock market means many things and logical definitely is not one of them. No one can predict with 100 per cent accuracy what will send prices up or down for any individual stock, group of stocks, or the market as a whole.

That's why having a professional portfolio manager - or gambler - on your side is so important.

The benefits of professional management are got in a mutual fund. The people who run these funds do nothing all day but analyze the markets and various sectors of the markets. They also have access to the executives in companies - the chairmen of the boards, the chief financial officers. These are the people who would not take a phone call from you or me but who will from the manager of a mutual fund that can invest crores. As a result, you have people working for you who have the benefit of up-to-date information and who have done the exhaustive research that most individuals are not capable of doing.
"Economy of scale" is another advantage of going with a mutual fund. When a fund buys a stock it is paying just peanuts per share in commission. An individual will pay more, especially if they are using a full-service broker.

There are many good stockbrokers but their main job is not analyzing, it is marketing, and finding new clients. A mutual fund analyst spends all his or her time analyzing.

While finding the right mutual fund takes the worry out of picking what stocks to buy, you still have to pick which mutual fund - or funds - to go with.

Some invest in a little bit of everything: technology stocks, service companies, utilities, manufacturing, whatever. Others are what are referred to as "sector" funds because they deal only in certain sectors of the economy. For example, there are funds that deal only with technology. Some deal only with the pharma industry. Some specialize in low risk stocks while others tend more toward riskier purchases and some try to keep an even balance of the two.

So when it comes time to pick a mutual fund, decide what sort of gambling you want to do. Then look at a fund's record. Has it made money or lost money? How much? And over what period of time? Has it made 9 percent over the last year? Has it made 18? How about 22 or 30?

Since picking a mutual fund can be almost as intimidating as picking a stock, you might want to work through a stockbroker. Brokers know what the different funds are and what they are investing in. They can also explain the differences and help you interpret their performance and what they will cost.

But every fund is different, and not all of them offer different types of shares. A broker can explain how any one fund operates.

You should spend extra time in picking a mutual fund, as you need to stay with them for a while. It's a long-term investment. You generally want to hold on to a fund investment for three to five years, or longer.

After all, the main difference between an amateur and a professional is that a professional usually has a better record. Anyone can get lucky from time to time, but the professionals are professionals because they themselves perform better more consistently over the long run.

Sukamal Bhattacharya is a Mumbai-based freelance writer. We look forward to your feedback.