Jul 7, 2003|
Last week’s poll: Our view
Equity markets are slowly gaining favour with the retail investor, and direct investments seem to be the most preferred way of investing in the stocks markets. In our poll carried out last week we had asked our online audience their most preferred mode of investment. Close to 77% of the audience rated direct investments as their preferred way of investing in the stocks markets. Mutual funds and derivatives did not find much favour with our respondents.
While a large majority of investors have stated that they prefer direct investment in equity markets, we would like to point out that the equity markets are not for the faint hearted. What we are trying to say is that direct investments in equity markets are suited for investors who can actively track the markets and are well aware of the facts regularly. This is imperative, as unlike fixed income investment options, equity investments need more investor attention due to their inherent nature.
Mutual funds on the other hand, are an ideal option for investors that do not have the time to actively track the stocks markets and their investments. The idea is to carefully choose a scheme that suits the investor need and conduct a background check on the fund manager. Equity mutual funds also take care of the diversification needs as regards to equity investments. In case of direct investments, equity investors have to spend considerable time and effort on reading about the economy, the sectors and the companies. In short, an investor has to be constantly on the look out for opportunities as well as threats.
Choosing equities on our own makes sense when we have identified a stock to grow our wealth and do not intend to keep changing our outlook on the stock every quarter. Long term investing perspective is a must for success in this form of investment. A strong belief in your investment rationale, even when the newspapers continue to predict a doomsday, is what it takes to build one’s own portfolio.
As regards to the derivatives market, the poll indicates that retail investors do not really fancy this mode of investment. Derivative products are short term in nature and they are volatile in comparison to its cousins like direct investments and mutual finds. One can attribute the poor preference for the same on the fact that derivatives are relatively difficult products to comprehend. Derivatives are essentially used as a hedge for the short term.
In our opinion a retail investor should have a good mix of direct investments as well as mutual funds in his portfolio. Also an investor’s investment needs depend on his/her risk profile.
Risk profile in turn is dependent on the age of the investor. For a young person the risk taking ability is higher and hence he can afford to have a higher percentage of savings invested in equities, both as direct investment as well as through mutual funds. As the risk profile of the investor alters with age, one needs to look for more stable options like fixed income investments. In conclusion, an investor needs to very carefully assess investment objectives in order to make his investments, either directly or through mutual funds.
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