There is confusion among investors and wealth advisors. Where is to put the money so that it can grow faster. The confusion has been continuing for a long time. In the end, investors appreciated the advantage of systematic investment plan in mutual funds. We have written two articles on this issue. One is systematic investment plan in mutual funds and another is investment in stocks systematically. Here, I will analyze why systematic investment plan has become more popular that stock investment plan.

1. Lack of time: Most people are exposed to stock market through different vehicles like mutual funds, stocks and ULIPs. These investors range from businessmen, software professionals to exporters and government employees. They are usually busy on their day to day activity. So lack of time is a constraint for them. If an investor invests in a stock then he is supposed to keep track of that stock. Lack of time does not give him that liberty. In mutual fund, there is a professional, qualified person who is takes care of the job on the investors’ behalf.

2. Lack of knowledge: Lack of knowledge is the biggest factor for the people not to invest in the stock market. An ordinary person who wants to invest in a stock, does not know which stock to invest and which to avoid. If he goes for blue chip companies, even then he would not be sure as to how fast his investment will grow returns. For direct investment, he has to acquire knowledge on sectors, government policies and opportunities in future. Lack of knowledge on these domains will discourage him to go for stock selection.

3. Risk averse people: Most of the investors are traditional investors and they want to play safe. Usually people create wealth after the age of 40 and they want to preserve the wealth rather multiplying it. Risk averse people do not want to put the money directly into the stock market. They want to diversify the risk by putting into a mutual fund. In 2008, when the global crisis emerged, some infrastructure stocks plunged so heavily that they are yet to make up even today. But in case of a mutual fund, the risk is diversified.

4. Income level of people: Income level of people is also a major factor. SIP in mutual fund starts at Rs. 500 per month and he can get an exposure of companies like BHEL, GRASIM and L&T through a mutual fund by investing Rs. 500 per month. But if he wants to put in those blue-chip stocks directly then he has to wait for 5 months to buy one stock of those companies.

5. Understand the value stock: The biggest challenge of an ordinary investor is to understand a value stock. In the market, there are some stocks which are overvalued and some are undervalued. The value stock investment is the key to get handsome return from the market. The investor has to understand and analyze based on research models and technical like Graham-Dodd model or Candle Stick model to understand value investing. It is difficult for an ordinary investor to understand these kinds of models. That’s why they prefer Systematic Investment Plan in mutual funds rather than stock investing plan.

6. Anti Behavioral Theory: In economics, it is said that when price goes up, demand falls. In stock markets, we observe the opposite behavior. When the price of a stock goes up, the demand increases. The investors put more money into that stock and tend to hold the stock by anticipating the further rise on price. So instead of selling the stock at highest level they hold the stock. Due to that when the stock starts falling; they could not book the profit and end up in losses. In mutual fund, the decision is with the fund manager and he is a professional who does not go by emotions to hold a stock.

7. Lack of rating in stocks: Mutual funds are rated by credit rating agencies. So an investor can easily choose by looking at the rating. In case of stocks, easy rating is not available. The investor either has to depend upon his own research or has to depend upon his broker or research houses which are generally paid services. Dependency on broker is much risky because his wrong anticipation or information can lead the investor to lose capital.

There are few people like Warren Buffet who made the fortune by investing into stocks. The investors who invested a mere Rs. 10000 in INFOSYS in 1993 are sitting at a fortune of nearly Rs. 4 crores today. But the important question is how many investors in India realized INFOSYS as value investing? And there are many stocks that got knocked out of market because of non performance. So it has to be realized that many an investors’ money has drained down because of direct investment into wrong stocks. Usually very few people understand value investing and that’s why very few made fortune in stock market. An ordinary investor wants to put his money in mutual fund. Systematic investment plan is a vehicle to put the money into a mutual fund and over the period of time it has over powered the stock investment plan.

This article is written by Soumya Sarkar. Soumya is the co-founder of Wealth Redefine. He worked with foreign banks like HSBC, Standard Chartered and RBS before founding this company at senior levels.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Wealth Redefine is a AMFI registered Mutual Fund distributor – ARN - 167127

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