Monday, April 10, 2017

Can One Simply Invest in the Stocks Figuring in a Good Portfolio?

Man sitting in a couch confused
Investor sitting in a couch wondering whether he can buy stocks figuring in good portfolio

Actual Question:

Instead of investing through a mutual fund, why should I not directly invest in companies by looking at the portfolio of that particular mutual fund?


Dear Friend!

Thank you, a very useful question indeed!

The answer is yes and no.

In an established portfolio you come to know of the shares in which the fund had invested but not the time and price at which the investments were actually made.

Let us take a practical example.

The ‘Portfolio 2K15’ is vale investor’s portfolio that contains about 15 best companies in India that were available at a reasonable price at one time. But now many of the shares are very expensive and should not be invested in today.

Please look at the table below which is shows the same best companies being rejected on the grounds of high valuations, namely ‘Price to Earnings (PE) Ratio’, ‘Price to Book Value (P2BV) Ratio’, a combination of both, and dividend yield:

Even though NMDC, MOIL, Hindsutan Zinc (HZL) and Vedanta are good stocks and find their place in ‘Portfolio 2K15’ today, in April 2017, they are expensive and hence not good for investing.

In conclusion one cannot simply identify the names of stocks included in a good portfolio and invest in them. Each of the stocks must be thoroughly investigated for their suitability in general and specifically whether they are available at a reasonable price.

Related article:

Thank you,

With Best Regards