Why people are vary to Equity and Mutual fund

Objective

1.Generating an additional source of income

2. Financing future needs
a. Buying a home
b. Building a retirement corpus
c. Child's education and marriage
d. Legacy Planning

3. Increasing savings/ Inducing savings

4. Reducing tax liability

5. Protecting your savings from inflation

Factors That Determine Your Risk Appetite

1. Current Scenario - Your age, financial dependents, assets and liabilities,

sources of income, level of engagement (active or passive investor) and
investible capital

2. Past Experience - Knowledge about investment products, inclination to

learn, nature and composition of the last held portfolio and its performance

3. Future Outlook - Time horizon available to fulfill the investment

objectives, liquidity requirements in the near future, importance of tax
savings vis-a-vis return on investment

4. Investment Attitude - Willingness towards risk taking, ability to

withstand short-term notional losses in return for long-term high returns

Based on your responses, an experienced MF advisor can determine your risk

appetite and classify you as a conservative, assertive or an aggressive
investor (there could be as many as five to seven investor classifications
suggesting different debt-equity allocations).

Questions
1. Why am I investing in a mutual fund?

2. What kind of returns do I expect?

3. What portion of my net worth would I like to set aside for investments?
 4. What do I intend to use the gains for? How many years do I have?

5. What is my investment objective?

a. Capital Appreciation
b. Capital Preservation
c. Achieving sustainable long term growth
d. Combination of Income and Capital growth

6. What kind of risk am I willing to take in the long run?

Direct Equity OR Mutual Fund?

Do you buy shares directly from the stock market or do you invest in equity mutual funds? The
former is engaging and fulfilling and the latter, less risky for you. In this article, we discuss when
it is meaningful for you to invest in mutual funds and when you should directly buy shares.

Goal versus Returns

The discussion relating to direct equity investment and mutual funds rests on your investment
objective. Are you investing to earn higher returns? Or are you investing to achieve life goals?
Suppose you want to send your child to the US seven years hence for her college education. Your
objective would be to accumulate enough wealth to pay for her education. True, having more
wealth in your daughters education investment account will not hurt. But having more wealth
also means taking higher risk. Which would you prefer: Taking minimal risk to achieve your goal
or taking higher risk to earn higher returns and, in the process, increasing the risk possibility of
failing to achieve your goal?

Needless to say, you would prefer to take minimal risk because accumulating wealth for your
daughters education is important. Now, direct equity investment carries high risk. Why? To be
successful at direct investment, you should be able to pick the right stocks and then sell them at
the right time. Are you confident of doing both? Importantly, do you have the time to continually
engage in this process?

Many individuals start their direct investments in all enthusiasm but lack the discipline to
continually allocate time to make the investment decisions. If you face similar issues, you should
consider investing in equity mutual funds to meet your life goals. The process is simple. You
have to set-up a monthly systematic investment plan on mutual funds that you think are
appropriate to achieving your life goal. If you find it difficult to select active funds, you should
start with an SIP on a Nifty Index fund. It is also behaviourally optimal to meet your life goals
through equity mutual funds. Why? Direct investment requires active decision making when
to buy and sell shares. You could have bought the share at a lower price or sold the shares at a
higher price. SIP on equity mutual fund helps you distance yourself from such active decision
making. And that reduces regret. Besides, index fund does not have the risk of under-performing
the market, thus reducing the failure to achieve your life goal.
Market timing

At times, you may invest just to beat the market. Such investments form part of your satellite
portfolio in the core-satellite framework. The objective of this portfolio is to simply capture
short-term price movements in the equity market. You should make direct equity investments in
your satellite portfolio. Why?

Your holding period for shares in the satellite portfolio is less than one year. But funds typically
impose a penalty if redemptions are made from investments held for less than one year. Such
penalty (typically one per cent) significantly reduces your short-term gains.

Then, there is the behavioural argument. You derive immense satisfaction when you identify a
stock and profit from the buy-sell transaction.

You do not get the same sense of fulfilment when your mutual fund investment generates similar
returns! Further, your inability to continually devote time to buying and selling shares will not
hurt; satellite portfolio is not aligned to your life goals. You should, however, seek professional
advice if you are unable to buy and sell stocks at optimal prices.