Do you have stomach for investing directly in equities?

Nirmal Rewaria
Edelweiss Securities

Investors often have to grapple with more than one investment option. Debt, equities, gold are some of the common investment options and the average investor spends considerable time and effort in evaluating where to invest and how much to invest, how to allocate and when to re-allocate. If all this sounds complicated, it is.

Make no mistake investing is a full time activity. If the individual dons the role of an investor, it leaves him little time for his primary role as a professional or businessman. He is called upon to juggle dual roles which can be stressful making him compromise on one to fully accomplish the objectives of the other.

So, the individual has to decide whether he wants to be a full-time investor or 'outsource' the job to a money manager and continue with his role of a professional/businessman.

Since most investors have limited skills in managing investments, it is an easy choice to make about what they want to continue doing and what they want to give up.

Within investments, two options that investors regularly grapple with are stocks (i.e. direct equities) and mutual funds (indirect investing). Both have their pros and cons, although that is not the subject matter of this article. We will instead delve into how stocks and mutual funds face off against one another in terms of time and effort required to monitor them.

1. Time is of essence:

Investing directly in the stock markets is a full-time activity. It may sound like a one-time activity, but isn't. There is research to be done both pre-investment and post-investment.

In addition to understanding the business of the company under review, the investor is expected to master related subjects i.e. sector and industry prospects, strengths of peers in the sector and how the company under review is superior to them.

The investor is further expected to study the economic and political climate of the country to assess the impact they can have on the sectors and companies in them. The same level of research needs to be done by the investor post-investment to vindicate his investment decision.

Clearly that this calls for considerable research which is why there are equity research teams with dedicated analysts studying a particular sector and related companies.

To handle the quantum of research you would need to take out time from your work to invest directly in equities.

If you have the time, you can consider investing directly in stockmarkets, else opt for mutual funds. Investing via mutual funds is far less time consuming.

Your financial planner should be able to help you identify the right funds; post that the responsibility of managing your money lies with the fund manager and your financial planner.

2. Skill is a necessity:

If you have the time to take up investing you have cleared the first hurdle. The other important decision you need to make is whether you have the requisite skill for research.

A successful fund manager hasn't got where he has because he had plenty of time at his disposal. He has the necessary skill and experience built over several years and market cycles. So apart from time, investing demands plenty of skill and experience.

3. Access to research:

Most investors who wish to take up investing as a full-time activity are likely to hit a roadblock in getting unrestricted access to quality research. While it may seem that the annual report should prove sufficient in this regard, the annual report is actually just the starting point.

For more information you have to read up extensively on the economy, sectors and companies in the sector. Some of this information could be available for free in libraries or on the internet for instance, but the quality, value-added research is usually available for a stiff fee.

In addition to reports, the investor should also aim at speaking to the company management regularly for an inside view. These meetings are not easy to arrange and are usually reserved for the elite (read fund managers, high net worth individuals, private equity managers).

The best retail investors can aim for is to get a question past the huge audience at the AGM (Annual General Meeting) which, with some luck, the management will address in a satisfactory manner.

Fund managers on the other hand have no problem paying for expensive value-added research. Also because of the clout they command (in terms of assets under management), company managements are happy to give them their time.

4. Following the money:

Some investors may want to play it smart by simply aping the investments of ace fund managers. This is more common with a big name in fund management like Warren Buffet whose smallest investment attracts a lot of attention with others also trying to get in at the same time bidding up prices in the process. For this reason, such investments are not publicized so as to keep prices low.

Also, fund portfolios are not disclosed on a daily basis and at time not even in entirety. This means it could be some time before the lay investor wises up to what the ace fund manager has bought or sold.

Put bluntly, investing directly in equities is for the individual with considerable time, expertise and even clout and chutzpah to overcome the considerable hurdles in the process. Else, there is always the mutual fund route to investing.