View and Counterview : Market Returns: Is Direct Investing the Best Approach?

For
decades, investors put their money directly into the market. A traditional
investor swears by buying shares directly for their returns! Many have made
humongous returns from investing directly in shares that turned out to be
‘multi baggers’ while some lost all they had.

For the
new investors, the busy lot or even the risk averse, there are several options
of investing indirectly through mutual fund and other schemes. This option
offers a reasonable risk- return profile. Indirect investing has allowed a
large number of citizens to participate in corporate growth stories and make a
decent return over the long term.

This fifth
VIEW and COUNTERVIEW aims to tell the story from both perspectives. Both
writers, connected to their respective areas for years, give two perspectives
for you to consider. Deven R. Choksey, an entrepreneur in the business of
shares and securities and a leading voice for the markets in media, shares his
views from his more than thirty years of experience. Aniruddha Sarkar, a principal
fund manager with an AMC, shares his perspective on indirect investing.

VIEW: direct
investing is the best form of investing

Deven r. choksey  

Direct Investing is like
driving your own car versus Indirect Investing is equivalent to commuting in
public transport. Destination being the common goal while travelling, both
comfort and time are key differentiators in public versus private mode of commutation.
Similarly, Investing is done with an objective. It can be fulfilled via direct
investments or indirect mode of investments, like Mutual funds etc.
Investment products have buyers across multiple investor segments i.e.,
Institutional, Family offices, High Net worth Individuals- HNI’s, Ultra HNI’s,
Retail investors. Therefore, there remains advantage and disadvantage between
investing through either Direct or Indirect route, depending upon the category
or segment of investor
one belongs to.

Primary objective across
various customers segment is generation of Returns, managing Risk and having
adequate Liquidity. Both the routes, whether direct and indirect, have their
pros and cons under each of the above aspects. As we all know, returns and risk go hand in hand, in case
of direct investments substantial knowledge on subject matter to support
decision making & considerable research is required before venturing in. I
would not call this as a hindrance for direct investment route, as nowadays we
have professional advisors to assist us into the decision making process. Let
me bring out one interesting fact to your attention, direct individual
investments in equities commands nearly 16.5% of the market capitalisation
versus around 5.4% of the Indian market capitalisation that is held through
Equity funds. Clearly, individual preferences remain with direct investments
versus indirect route of investments. In US markets also there has been clear
shift from direct investments versus investments through mutual funds; there
has been decent rise in Independent Advisors therein who cater to individuals
for investments.

Let us see how the
following primary objectives are managed under respective routes of
investments:

a.   Returns b. Risk c. Liquidity d. Cost

a.
Returns: For the last 5 years, investments into Direct Equity, say for
eg., Current top 5 companies by market capitalisation have fetched 30.8% CAGR
vs. Top 5 Equity – Large Cap Mutual fund CAGR returns of 20.1%. One needs to
bear in mind while choosing the indirect route the demerits of change in fund
manager at Asset management companies, change in purpose of schemes, non
customisation of portfolios. Compulsions of common pool investments as required
to be followed in MF acts as deterrent whereas direct investment has its own
character in managing the returns objective.

b. Risk: Investors
risk profile tends to change with segment and category they fall into. The
preferences to attain final objective for aggressive investor will be different
from those who are believers to passive style of investments. In case of Direct
Investments the customisation stands as an advantage based on individual risk
profile needs versus Indirect Investments which is more standardised instead of
being customised.

c. Liquidity:
Benefits of direct investing is generation of adequate liquidity
within 2-3 working days. In case of indirect investing, one may witness
additional burden in form of exit loads to find speedy liquidation.

d. Costs:
In case of indirect investments management charges are levied under individual
schemes, which are not in case of direct investments.

While we
have seen the pros and cons under individual’s primary objectives of Returns,
Risk, Liquidity and Cost, let us also find out how secondary objectives are
dealt under direct and indirect investments.

1. Build
knowledge capital & Earn [Earn-Edge vs ROI]: It
is always beneficial to know the company that one invests versus knowing your
fund manager. Which means it is better to be dependent on company management in
which funds are deployed rather than on fund manager who will be deploying your
money. Think about it, isn’t it assuring to have financial gains with knowledge
capital versus only financial gains. My take is, direct investing is all about
individual’s passion for growth in investments vs passive growth approach.

2.
Investment Advisor: To put it simply, one good
book is knowledge, one good friend is equal to 100 books, an ocean of
knowledge, and a friend as an investment advisor is a navigator in the
journey of wealth creation. Professional investment advisors are a great
help and preferred support for active management of investment goals. One can
gain expertise and develop analytical skill with guidance of investment
advisors. According to me, there is no match to information sourced from tips,
social media or likes of Google or any other media sources that always limits
itself to information and does not compliment to the conviction extended by
investment advisor. Regular review and monitoring mechanism can help achieve
the objective with higher conviction on end results.

3. Easy
to maintain as any other Asset Class: In case
of direct investments, at times it is found that maintaining of records is
tedious and disadvantageous. I believe, maintaining own investments is as easy
as maintaining investments in any other assets including MF, insurance etc. We
need to follow discipline to invest in sets. SIP in MF, Annual Premium in
Insurance are in-built investment systems. Direct Investments help us to invest
with conviction whereas indirect investment is often swayed with sentiments.

4.
Diversification not a suitable solution:  An investment in indirect route generally
comes with diversification and involves  
investing    into    companies in excess of 30-50 at times in
individual schemes. Wealth creation is matter of investing in value and growth
companies and not supportive of diversification which tends to dilute the
successful ones with unsuccessful stories.

Direct investments have an
inbuilt character of allotting higher weight to growth and it is a science. All
it needs is an attention. Simply the ability to add dynamic weight produces
extraordinary results.

As long as trading instinct
is brought under control and CAGR is allowed to be employed, direct equity
produces better ROI. Classic example of wealth creation is depicted in table 1:

TABLE:
1

5.
Customisation to objectives: While
the broader goals and objectives can be met both under direct and indirect
route of investments, when it comes to meeting of objective within stipulated
parameters, investing through direct route, is always beneficial. In case of
indirect investment customisation beyond a point is not possible because of
productised approach. Let me explain with an example, say for an individual
investor has an expertise and understanding in manufacturing industry based on
his background. It will be inappropriate for him to invest in a product that
offers Pharma companies or any other business, since his knowledge would be
insufficient to assess the risk he is engaging himself into.

Finally, we have seen that investing route
direct or indirect is subject to type of individual you are and preferences to
primary objectives, as spelt earlier with respect to travel; we are well versed
with different level of comfort in 3 modes of travel i.e. Self Driven Vehicle,
Driving with a Driver and Travelling as a Passenger. Investing in direct
equities is no different from the satisfaction received through individual’s
own decision to investments versus decision taken by fund manager. One may also
bear in mind the modes of investment also depends on ticket size of investment.
In case of small investor, the preferred route of indirect investments will be
beneficial and vice-versa for large investors.

In case one has urge to
gain exponential returns with substantial risk taking ability, then direct
investment is a better avenue as compared to indirect investing.

counterVIEW: INDIRECT
INVESTMENTs WORK BETTER FOR MOST PEOPLE

Aniruddha Sarkar   

Though the culture of
equity investing has been prevalent in India for many decades now, yet equity
investing in India is still at its nascent stage. The penetration of equity
exposure among the households is merely 3-4% which includes all the organised modes
of investments (Mutual Funds, PMS, AIF) as well as direct equity exposure. This
figure is small by all global standards and has a great scope for increasing
penetration going ahead. In this regard a key question which comes to an
investor’s mind is which is the better suited path to take when it comes to
equity investing. Earlier investors had only two options to choose from; namely
direct equity and mutual funds. Then came Portfolio Management Services (PMS).
Now, since the last few years AIF has taken the industry by a storm. So, the
dilemma has increased even more for investors as to what is a better way ahead
for equity investing.

We believe, unless an
individual can devote a substantial amount of time in studying and
understanding the market and at the same time keeping track of events and news
flow that pertains to the equity market and his portfolio stocks, one should
always give his money to be managed by professional money managers like Mutual
Funds, PMS and AIF. Equity investing is one of the most dynamic activities and
cannot be done in a silo. Would like to break-up the benefits of having an
indirect exposure into equity markets through professionally managed route into
the following broad heads:

–   Managing
Risk and Return; making more informed decisions: Equity
returns is all about managing risk and return and getting the balance right
makes all the difference. Investors most often expose their direct equity
portfolios to very high risk and not take risk which is commensurate with the
returns expected. Risk has many facets of it and can be in various forms. Lack
of adequate information before investing in a company and not keeping track of
developments in the portfolio companies is a major information risk which
direct equity investing is faced with. Also, concentration risk is there when
too much capital is allocated to a few stocks and if something goes wrong in
any of the high concentrated stocks, then it impacts the whole portfolio
returns. Unlike in a Mutual Fund or in a PMS, the investment manager and his
team is always on top of all developments that keep happening in the markets
and their portfolio companies. This helps in making quicker and more informed
decisions regarding portfolio changes. Also, portfolio managers balance risk
and return aspect in a more scientific manner by not exposing the clients’
money to high risk, as there are several internal checks within the asset
management companies to monitor this aspect.

–  Access
to companies for making decisions: When
investors approach equity investment directly, their access to company
information gets limited to accessing annual reports and earnings transcript
and reading online public information. However, for professional money
managers, access to company management, plant visits, institutional access and
analysts meetings is something which helps them to make more informed decisions
when it comes to equity investing.

–   AIF
platform offers diverse financial products: With the
AIF platform being launched by SEBI in 2012, the ability of the investment
managers to offer diverse products on the platform has taken a huge leap in
financial innovation. Within the three categories (CAT I, CAT II and CAT III)
of AIF, we now have diverse product offerings spread across listed equity,
unlisted equity, debt instruments, Real estate and Commodities. Having a
diverse basket of these products along with Mutual Funds and PMS, helps in
having the right Asset Allocation for the investors which is of prime
importance in the journey of making long term wealth. There are some financial
products wherein investors are also given access to investing into overseas
equities, which is otherwise very cumbersome if one has to go directly. 

–  Freedom
to choose investment managers and switch between them:
During different periods different investment managers outperform others. As an
investor, you have a choice to switch between the managers and at the same time
have a basket of investment portfolios which is managed by different investment
managers. This helps in generating a more balanced return for the portfolio at
a consolidated level.

–   Less
hassle and professional approach at competitive fees:
We have come a long way in Indian Equity markets from the days of Open cry in
the ring at BSE. Equity investments are now managed by professional fund
managers and SEBI which governs and controls all operations of the Mutual Fund,
PMS and AIF industry. This has helped in bringing the best global practices of
the financial service industry to Indian investors. Access to single statement
which shows all holdings of investors across investment managers, ease of tax
statements and lower fees due to increased competition in the financial
services industry is something which makes life a lot easier for investors
coming through the indirect route for equity investing.

Thus, we see that where there is paucity of time and where investors do
not have the bandwidth to spend a lot of time on understanding companies, on
reading annual reports and in understanding financial statements, it is best
not to enter the equity markets directly and better to invest via the mutual
funds, PMS or AIF route. What we have seen in the past is that when the bull
markets happen, more and more investors get lured into the equity markets and
start buying stocks directly based on hearsay and ‘tips’. These are recipes for
disaster and investors should be careful about not burning their hands in this
manner. At the same time, if there is any investor who thinks he has the
bandwidth and time to devote to the equity markets, he should gradually start
taking baby steps in the market through direct equity and invest only after
doing detailed analysis of the portfolio companies. This would also help in
building more discipline in the investing style and in building great amount of
knowledge about companies and markets. The benefits of professional investment
managers cannot be ruled out even for a client who likes to do direct investing
because of the access to a plethora of different financial products which are
otherwise not available when doing directly.