Last Updated on February 21, 2021 at 10:37 am
A common question that troubles several investors, particularly newbies, is, can I get better returns from stocks instead of equity mutual funds? Many feel like they are missing out on better returns by staying away from stocks. They feel like they need to have at least “some exposure” to stocks—a discussion.
A while ago, I addressed an investor club, and no one there was above the age of 22! Many of them found it odd that I took to investing in stocks rather later, and it is only a small portion of my portfolio. One member asked me the question that led to this article. Most of their previous meetings were about stocks – how to choose them, how to value them etc., and the obligatory how to trade in crypto sessions.
To the typical young investor, picking stocks for the long term may not be as cool as crypto or general trading. Still, it is definitely more fashionable than investing in mutual funds. Let us get right to it lest I lose their attention: There is no way of knowing or answering if one particular stock portfolio can beat one particular mutual fund portfolio.
So the answer to the titular question: We do not know; we cannot know. That is if you value an objective answer. If you want opinions or what people believe is more likely without data, you need to look no further than this article’s comments on social media. The rest of this article is about why we cannot know.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
First, take the case of active mutual funds vs passive mutual funds. If we wish to know how active mutual funds have fared against the “market”, a study such as this is possible: Active mutual funds struggle to beat Nifty 50 for the last seven years!
If we wish to know whether the situation will continue in future, there is no way to predict. Still, a reasonable assumption is possible: active funds will go through periods of underperformance and outperformance (wrt to the index), and when viewed collectively, we can assume not much is going to change.
If we wish to know whether X active fund or Y active fund will beat the index in the future, then even this reasonable assumption cannot be made. To borrow a line from Asterix, maybe they will beat the market, maybe they won’t; I can’t say for sure.
Why? Because we are considering a single stock portfolio. Its past performance is quantifiable, but no one can predict one particular fund’s future performance – not even a passionate index fan.
Now take the case of real estate. If you ask, “over the last ten years, which has done better in India” stocks, gold or real estate?” The answer is, “we do not know”. The past performance of stocks and gold can be quantified, but not real estate. It is extraordinarily location-dependent and people-dependent.
There is no real estate index to compute trailing returns or rolling returns – at least no index that reflects ground reality. We only have useless anecdotal evidence: “my uncle made 3X profit in ABC locality.”
Forget the future. There is no proper way to analyse the past when there is no quantifiable data. This is the exact problem with individual stock portfolios. A person can create a stock portfolio in a zillion ways; They can change it over the years in a zillion ways.
They can compare their portfolio with an index – see, for example, My Stock Portfolio Feb 2021 – but that one cannot use the results to judge about stocks vs mutual funds.
Sure there is plenty of opinions on the matter – the loud voices are often from those with a conflict of interest.
- Stock picking takes hours and hours of effort.
- Managing a stock portfolio is hard.
- Even professionals have trouble beating the market etc.
The root cause of the problem is trying to take sides when one cannot. The reality is, mutual fund investing is no easier than stock picking. Most investors cannot decide which fund to pick, which to sell or how to construct a portfolio. Many of them hold so many funds that it resembles the market with expensive fees.
Both direct equity and stock picking requires focus, conviction, discipline, appreciate of risks – identical traits. So, where is the problem?
Taking sides when one cannot: Many feel a stock portfolio will do better than a mutual fund, and all they can offer as evidence is theory like “how a fund manager is constrained by money pooling”.
Many others feel direct equity investing is harder and bound to fail because most investors do not know how to pick stocks. Stay long enough in a personal finance forum like Asan Ideas for Wealth, and you will recognise that most investors are clueless about mutual fund investing.
Want to believe what we do is best: Many of us need to think our choices are the best and bound to do better in future. This is like asking, “I am getting married tomorrow. Will it work?” The only truthful answer to both: We do not know.
So what is the solution? Embrace our inability to know the future (and brace for it!). One can happily invest in stocks and mutual funds in any proportion we like. Only you can decide what is right for you.
Which is better? As they, “I guess we will have to find out!” You will know only by spending time and money. The experience is guaranteed. The higher or lower return is not.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! You can watch podcast episodes on the OfSpin Media Friends YouTube Channel. 🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available! Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)