Investing in stocks can be both exciting and nerve-wracking, especially with the plethora of investment options in India’s investment landscape. Amidst various opinions and biases from experts and influencers, it’s crucial to find what suits you best. In this article, we’ll be your guide in exploring different equity investment choices, such as Direct Stocks, PMS Schemes, Mutual Funds, and ETFs.
The Context
Investing in equities or stocks has always been a proven path to building wealth over time. However, the abundance of investment options in India can often leave investors feeling restless, unsure, and uncertain.
In the investing world, many experts and popular financial influencers have their own biases, which are influenced by their past investment successes, intelligence, and market knowledge. While we all have our thoughts and preferences that suit our unique situations, it wouldn’t be fair to assume that a single approach fits everyone perfectly!
At our core, we strive to provide unbiased content that empowers our readers to make their own informed decisions. In this unique article, we’ll take you on a journey, exploring different equity investment options like Direct Stocks, PMS Schemes, Mutual Funds, and ETFs, so you can introspect and find the best choice for yourself.
Let’s take a closer look at each instrument, revealing its true nature and suitability.
Choice No.1: Direct Stocks
Direct stock investing involves purchasing shares of individual companies listed on stock exchanges. While it offers the potential for significant returns, it requires a deep understanding of the market, financial analysis, and constant monitoring.
While adopting a gig approach to stock picking based on tips and suggestions from social media influencers might seem enticing, it’s essential to remember that successful investing requires a careful and thoughtful approach, involving time, understanding, and commitment.
Simply put, when it comes to direct stock picking, the responsibility of making decisions lies solely with you. It demands an academic approach to learning and continuous practice to make profitable choices.
Historical data suggests that experienced and knowledgeable investors can outperform market averages. However, novice investors may face higher risks due to stock-specific fluctuations and a lack of diversification.
The returns from direct stocks can vary greatly depending on the specific stocks you choose and your skills as an investor. Historically, the BSE Sensex and Nifty 50 have shown average annual returns of approximately 12% to 15% over the long term.
However, keep in mind that your stock returns may differ based on factors such as your understanding of fundamentals, technical aspects, growth prospects, and buying stocks at fair values. It’s essential to consider these factors when investing in individual stocks. Remember, a lack of expertise can lead to significant losses.
Choice No 2: PMS Schemes
PMS (Portfolio Management Services) schemes offer a personalized approach to managing investment portfolios, with professional fund managers making decisions on behalf of clients. They provide customization and direct ownership of underlying securities but require a higher minimum investment and may involve higher fees. The historical performance of PMS schemes can differ based on the manager’s skill, emphasizing the need to select a reputable and proven manager.
It’s important to note that PMS schemes are not accessible to investors with smaller portfolios due to their minimum investment requirements. Initially set at Rs 5 lakhs in 1993, this minimum amount was later raised to Rs 25 lakhs and further increased to Rs 50 lakhs in November 2019. This move by SEBI aims to limit small investors from entering high-risk products like PMS, which are better suited for financially aware investors with larger portfolios.
Another aspect to consider is the charges associated with PMS investing, which may include fixed fees and profit participation fees. These charges can vary, and some may impact potential gains significantly.
In 2022, the equities market faced challenges, and PMS schemes showed diverse performance. As per the data we received from “pmsbazaar” around 30 PMS schemes delivered one-year returns in double digits, ranging from 10% to 35%.
The top performer, Molecule Ventures – Growth, a smallcap PMS fund, achieved the highest return of 35.2% in 2022. Conversely, over 100 PMS schemes experienced negative returns within the same time frame. In comparison, the Nifty index gained about 4% for the full year of 2022.
Considering these variations, it’s clear that good PMS schemes can show widely different average returns, primarily influenced by the expertise of the fund manager and prevailing market conditions. Historically, top-performing PMS schemes have delivered annual returns ranging from 15% to 20% or even higher.
Choice No. 3: Mutual Funds
Mutual funds are one of the most popular investment options where money from multiple investors is pooled to create a diversified portfolio of stocks. They offer benefits like diversification, professional management, and easy access to your money when needed. However, their performance depends on how the overall market is doing and the skill of the fund manager. Be mindful of the expenses, including the expense ratio, as they can impact your overall returns.
While historically, mutual funds have shown decent returns, especially over the long term, it’s crucial to choose them wisely.
On average, equity mutual funds have delivered returns of about 12% to 18% over the long term. ELSS funds, which provide tax benefits under Section 80C of the Income Tax Act, have performed similarly.
If you’re interested in learning more about mutual funds, we have a dedicated section on our website where you can find valuable information. Feel free to click here and explore further!
Choice No. 4: ETFs (Exchange-Traded Funds)
ETFs, or Exchange-Traded Funds, are quite similar to mutual funds, except they trade on stock exchanges like individual stocks, giving them the best of both worlds.
They offer instant diversification, lower expenses, and real-time pricing. ETFs are designed to mimic the performance of a specific index, making them cost-effective and tax-efficient. Historically, they have shown promising returns, making them one of the preferred investment options for passive investors who may not be too familiar with the intricacies of investing.
For instance, Nifty BeES and Nippon India ETF Bank BeES are examples of ETFs that track the Nifty 50 and the Nifty Bank index, respectively.
In general, ETFs aim to replicate the performance of the underlying index. Historically, major Indian market index ETFs have provided average annual returns of around 10% to 12%.
Conclusion
Each investment option comes with its own set of risks and rewards. Direct stocks carry the highest risk but can lead to substantial returns for experienced investors. PMS schemes and mutual funds have moderate risk, thanks to professional management that helps mitigate risks which comes at a cost. On the other hand, ETFs generally carry lower risks due to their diversified nature, but they might offer more modest returns.
Investing in equities can be a fulfilling journey, but it’s essential to carefully assess the risks and rewards. A balanced approach is often a wise strategy, combining direct stock investments for those who have a deep understanding of the market and possess the skills to navigate it successfully.
At the same time, diversifying through mutual funds and ETFs can bring stability and reduce overall risks. By doing so, you can leverage the expertise of fund managers while benefiting from the diversification and cost-effectiveness that these options offer.
If you’re interested in enhancing your understanding of the stock market and honing your investment skills, be sure to check out the free stock market course offered on our blog.
Invest wisely!
