The great legendary investor “Warren Buffet’s”, stock picking abilities are part of folklore now. We all know how he created a fortune by identifying and investing in the right businesses when the shares of those companies were down in the dumps. Closer home in India, Mr. Rakesh Jhunjhunwala is one such personality among many who has successfully created wealth, by following a similar approach.

What’s common in these two legendary investors was their educational background. Mr Buffet did his masters in Economics while Mr, Jhunjhunwala is a Chartered Accountant. Their educational background and an underlying passion for numbers helped them understand the financials and balance sheets of companies, which in turn enabled them to take informed decisions.

The success of such great investors inspires a lot of us, including first time investors to invest in the stock markets directly by purchasing shares of listed entities. While it is good that first time investors have started looking up to equities as long term wealth creators, it’s equally important to know the pitfalls that await them.

Ask yourself these questions before you take the plunge.

1. Do I understand how to evaluate stocks?

Evaluation of shares would require you to go though the balance sheets of the selected companies and understand the numbers and find out details of the management, future growth prospects, etc. It also requires one to calculate the various fundamental analysis parameters such PE ratios, EPS (earnings per share), etc.

2. Do you have the time to research stocks?

The above process would consume a lot of your time. If you are a salaried employee or in business, will you be able to find time for the above activity? A lot of employers are now prohibiting access to financial market websites in order to prevent employees from frittering their time on this activity while in office.

Chances are that most of you would neither have the time to devote to this activity nor be able to understand the technique of valuation. Does this mean that first time investors cannot invest in stock markets? The good news is that you can invest in the stock markets by the indirect route of Mutual funds.

Mutual funds are pooled investments that are professionally managed by people who understand the stock markets and stock valuations much better than most of us do.

Mutual funds in India have been established as trusts and they provide investors with the following benefits.

Diversification

We have learnt not to put all eggs in one basket lest we might run the risk of losing all the eggs in case of any adverse eventuality. A single mutual fund scheme invests in a range of companies comprising various sectors in order to provide diversification. So with a limited amount of investment, you can get exposure to several good stocks which might not be possible if you invest directly in shares. For example, if you want to invest a surplus amount of Rs. 10,000 in shares of bluechip companies, you might be able to buy few shares of some companies since the rate per share of good companies might be available in the range of Rs.500 to Rs. 1000 and therefore the desired diversification may not be possible to achieve.

Professional Management

Mutual funds have a professional set up which is well regulated and comprising of their own research team and analyst’s who have their job cut out to study, analyse and identify the right companies and multi baggers according to the investment objectives laid down by the scheme.

Range of products available

Mutual funds provide a range of equity as well as debt schemes to suit the various requirements of investors. Depending on the specific needs and time horizon the products can be selected.

Liquidity

Mutual funds provide you similar levels of liquidity that comes with investing in shares. In some ways Mutual Funds are better – Equities can turn illiquid, whereas providing liquidity in MF is the fund manager’s job. Hence, liquidity is assured, should you require the money, unlike in Equities.  For Equity funds, the redemption proceeds are credited in 3 working days post the submission and acceptance of redemption form, while for Debt funds it can take between 1 and 3 days depending on the scheme.

Reduction in transaction costs

Investment in a diversified range of shares would increase your transaction cost along with the demat charges which have to be paid every year. In mutual funds the charges would be comparatively lower and are of two types: Exit load if the investment is redeemed within 6 months to 1 year & Recurring charges which are in the range of 2 to 2.5% per year.

It helps in inculcating discipline

Mutual funds offer a recurring investment method which is popularly known as SIP (systematic investment plan). By these methods,  even small amounts ranging from Rs. 100 to Rs. 500 can be invested every month for a pre-decided period according to your set goals. This investment can happen through the ECS (electronic clearing system) mode and is devoid of any hassles. This ensures that once you begin your sip investment, then regularly the debits would happen and ensure savings in a disciplined manner.

So go ahead and take an informed decision with the help of your financial planner.