Portfolio Concentration Could Reduce Risk

Dart hitting bull's eye depicts portfolio concentration

"We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it."

Warren Buffett

Self-Investment or SIP?

Picture Shows investor's dilemma of Self-Investment or SIP?

Actual Question:

As an investor looking for the best returns, should one learn fundamental analysis & invest in stocks or identify good mutual fund schemes and invest via SIP?

Answer:

Dear Friend!

The answer depends on the investor’s interest in learning and making investments on his or her own and to invest time for this purpose.

Mutual funds (MFs) through are the best for those who do not like or do not have time or both for making their own investments. But there are a few fundamental problems with MFs as follows:

1. They bring out many schemes with exotic names under categories like income funds, growth funds and so on often confusing the investors.
2. They keep on churning the portfolios to justify the managing fees charged and the money managers in turn churn the portfolios to justify their salaries causing a lot of harm to the investors.
3. They charge heavy management fees ranging from 2–4% per annum - which is unjustified.

For long term wealth creation an investor simply choose a well diversified equity index fund of a very large fund house that is all.

Alternatively, an investor can purchase Exchange Traded Funds (ETFs) every month that tracks any popular index like S&P BSE Sensex or NSE’s NIFTY 50. The advantage is:

1. Investor can simply buy the ETFs herself on any online trading platform implementing self disciplined SIP.
2. Fund management charges of a SIP are only in the range of 0.50 to 0.60%

Only important thing is that once invested the investments should simply be forgotten for 20 to 30 years.

If an investor wants to invest himself or herself one shall learn investing first and become a value-investor.

Reading the book “The Intelligent Investor” by Benjamin Graham is the first step recommended.

Suggested Further Reading:

• How Frequent Changes to Mutual Fund Portfolio Affect Investor Interest?
• Index Funds of Top 10 Mutual Funds
• What is an Exchange Traded Fund?

Thank you,

With Best Regards

Anand