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What makes more sense for defence services personnel - buying shares directly or going for equity mutual funds?

These days one of the main questions in front of many considering equity investing is whether they should buy shares directly through their brokers or invest indirectly through a portfolio of mutual funds. Let’s help you answer this question.

While many armed forces personnel were late to adopt equity thanks to their reliance on their trusty DSOP funds and pensions, others were keenly looking at equity and the potential that lay within this asset class.

The case for equity has become much more apparent to serving and retired members of the armed forces in recent years. While they have their pensions, many realise they will need more to keep their lifestyle intact post-retirement.

A bit of history

This led many, especially those who began to invest in equity in the nineties, to start with the direct purchase of shares and stocks. Their postings in the occasional “big” peace station meant access to brokers. This, not too long ago, meant visiting physical offices or having a representative visit their quarters. 

After a whole bunch of paperwork, many officers invested based on what their broker told them. Others took equity investing upon themselves and read through financial statements and newspapers to discover companies to invest in.

In the past decade or so, investing has become a lot easier than it used to be when tonnes of paperwork was involved just to start investing. While this has mostly gone digital, the challenge of finding the right company to invest in still remains.

These days one of the main questions in front of many considering equity investing is whether they should buy shares directly through their brokers or invest indirectly through a portfolio of mutual funds. Let’s help you answer this question.

In a booming market, it can be suspiciously easy to make money in otherwise bad stocks, but in the long run, companies that aren’t fundamentally good tend to wither away. Finding which stocks are long term bets and which are not requires a good mixture of knowledge, science, experience, and no small dose of luck.

Ability matters when it comes to owning shares

Stock picking really matters when investing in equity directly. You need to have at least a decent idea about business fundamentals, the ability to analyse and read financial statements, follow corporate actions such as dividend announcements, bonus issues, etc and the ability to analyse price movements.

In the 90s these skills were given due weight and importance but thanks to the proliferation of trading apps and discount brokerage, it’s become very easy to buy stocks and even more complex instruments these days. The problem is that anecdotes about easy money thanks to tips and rumours have outweighed real skill in stock picking, at least as far as retail investors such as you or us are concerned. 

In a booming market, it can be suspiciously easy to make money in otherwise bad stocks, but in the long run, companies that aren’t fundamentally good tend to wither away. Finding which stocks are long term bets and which are not requires a good mixture of knowledge, science, experience, and no small dose of luck.

Not many have this combination of skills. This is why professional money managers like mutual fund managers tend to have entire teams of analysts who analyse stocks to the best of their ability.

What makes sense?

For the vast majority, including most defence services personnel, it makes a lot more sense to go with managed funds like equity mutual funds or even passive funds like index funds rather than buying individual stocks.

The sense comes from the fact that you are leaving the nitty-gritty of choosing stocks to a professional fund manager or in the case of a passive fund to someone who replicates the index. 

Companies come and go over the decades and thus it becomes important to generally have more winners rather than losers in your portfolio. Your best bet for this is to either invest with a professional money manager in the form of an equity mutual fund or in the index through index funds.

You won’t always be able to keep in touch with your portfolio 

As a member of the armed forces, you will be in situations where periodically you will barely have any time to monitor your portfolio or even listen to the news. For example, those serving in high-altitude areas or submariners. 

In direct equity investing, more often than not you might have to be active with your investments in case of a major event affecting the stock you own. You can see how this can be an issue. You don’t have to worry about such things by being invested in, active or passively, managed equity funds.

Automate equity investing

When you want to benefit from the long term inflation-beating growth of equity and not want to worry about managing an active portfolio, going with mutual funds simply makes more logical sense than trying to buy individual stocks and managing them on your own. 

For people with unpredictable commitments, automating equity investing through a mutual fund SIP is simply the smartest approach to equity. The fact that a SIP helps you average your investment cost by helping you buy more units when the market is down and fewer units when the market is up, is just another benefit that helps you build real wealth while staying disciplined.

This will ensure that your long term wealth creation doesn’t depend on how much time you can give it. Even looking at your portfolio and reviewing it occasionally when you get the time, will be more than enough to ensure you stay on track towards your goals.

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