Why should investors in mutual funds before stocks?

There is a considerable interest in earning money from the stock market, drawing in both newcomers and seasoned investors in the Indian context. As of January 2023, statistics shared by Motilal Oswal Financial Services reveal a notable increase of 34% in demat accounts by December 2022 compared to the previous year. While mutual fund holdings have also seen a rise, the data does not indicate an exponential surge.

mutual funds

Surprisingly, there seems to be no evident correlation between the growth in demat accounts and mutual fund portfolios. Behavioral analysis, however, suggests that modern investors, driven by a desire for direct engagement in stock investments, often disregard the incorporation of mutual funds in their financial strategy. Specifically, among those seeking quick profits amid market volatility, there exists skepticism regarding the effectiveness of mutual fund investments. Some stock market investors, particularly those focused on capitalizing on market fluctuations, question the value of including mutual funds in their wealth creation approach.

Hiren Thakkar, Chartered Accountant Proprietor of Hiren S Thakkar & Associates, offered insights on the matter. He highlighted that the choice between direct equity and mutual funds is subjective, but from a risk management perspective, direct equity requires extensive analysis and research for substantial returns. Conversely, mutual funds demand comparatively less analysis. Thakkar suggests starting with mutual funds before venturing into direct equity investing, contingent on acquiring knowledge in fundamental analysis and sector-specific intricacies. He underscores the importance of dedicating time to reading annual reports and other relevant materials for success as a stock market investor.

Suresh Sadagopan, the Founder of Ladder7 Financial Advisories, highlighted a preference for managed funds, with mutual fund schemes being among the recommended products, and direct equity investments rarely suggested. Given the widespread lack of awareness about the complexities of stock market investing among the general public, it may be more advantageous to establish mutual funds as the foundational element of a portfolio, with stocks playing a supplementary role. However, the suitability of this approach depends on how investors conceive and plan their strategies for wealth creation. Successfully navigating the stock market as an independent investor requires the capacity to conduct thorough research and understand the intricacies of the companies in which one invests. This involves studying financial statements, reviewing news articles, and analyzing reports from financial analysts. It also requires consistent and vigilant monitoring of the stock market on a daily basis.

Contemporary investors prioritize advancing their careers and enhancing skills in their chosen professions to make a significant impact at work. Engaging in direct stock investing at this stage could serve as a substantial distraction from professional commitments, as delving into equity research requires substantial study and constant market monitoring. Investing in mutual funds poses its own challenges, especially for individuals unsure of their risk appetite or how to define their financial goals. Additionally, the introduction of new fund offers in separate categories by asset management companies (AMCs) can add to the confusion. Initiating systematic investment plans (SIPs) with equity funds, including index funds, offers a solid introduction to the world of equities. This approach allows investors to navigate market complexities without the distractions and stress associated with direct stock investing.