Sunday, 1 July 2012

Customisation vs Standardisation

Guess everybody remembers their dream vacation. The nice places you visited and the beautiful pictures you took as memories. Coming to the pictures, I guess that most of you were comfortable using the point-and-shoot cameras that are so popular for their ease of use.

The point-and-shoot cameras are popular for many reasons but chiefly because of their ease of use. They perform well for most of the situations. You don’t need to worry about extensive adjustments, deep down technicalities or photographic know-how. Just turn it on and click away. You can be assured of nice quality shots most of the time.

Compare this with any high-end DSLR camera. To use even the basic version we need to have some amount of photographic knowledge like the focal length, aperture settings etc., to be used for different situations. Apart from all this, some more time has to be spent on learning the controls of the camera. However, provided somebody has spent enough time to learn all these things and become deft at using the camera, the end result (the photo) from a DSLR is far more clear and of high quality compared to our Point-and-shoot cameras.

Conclusion? The point-and-shoot cameras perform a very good job of taking pictures for most of the circumstances but compared to the DSLR camera, the point-and-shoot cameras are found wanting in many respects.

Now, coming to the real thing. A similar sort of difference exists between investing in Mutual funds as compared to investing in individually selected company stocks. It is a good thing for beginners to stock investments to be clear of the difference while learning to invest.

Mutual Funds :

  • Mutual Funds (MFs) are like our commonly used point-and-shoot cameras. They give satisfactory results most of the time.
  • Select any good MF and you can rest assured that you will get decent returns. The amount of time spent in selecting an MF is almost similar to that you would spend to study any stock. Once you select a good MF and invest in it, you can be assured about decent returns.
  • You need not worry about issues of diversifying your capital or of tracking the individual stock performances of hordes of companies. It is the headache of the fund manager to make the right decisions and give competitive returns.
  • Performance of any top rated MF over the past 5 years will show that expecting a return on investment of about 30% is reasonable enough.
Investment in Stocks :

  • Coming to individual company stocks, we can compare it to the DSLR cameras. Good stocks are difficult to spot, they have to be tracked continuously, you have to know a little bit more about the companies that you invest in and some knowledge about how the stock market operates.
  • Provided the investment in stocks is made after thoroughly studying the company, then the return on investment is far far more than what can be expected from any top rated MF over similar investment duration. 
  • MFs can never give returns comparable to good stock investments because of the very nature of an MF. The fund manager invests in various stocks on your behalf and this leads to an inherent averaging tendency.

Though it is advised to invest in MFs in the spirit of diversifying your asset classes, it is well worth one’s time to do a study of some 4 to 5 good companies and periodically invest in them too. As you can expect far more returns by putting some effort and investing in good stocks. It is easy to learn to invest in stocks and you can browse through Learn to Invest section, where we have given various relevant concepts.  Investor discretion is advised before selecting any stocks for his/her investment.