WHY DO HIGH-NET-WORTH INDIAN INVESTORS PREFER DIRECT EQUITIES (SHARES) OVER EQUITY MUTUAL FUNDS?

In the dynamic world of investments, high-net-worth individuals (HNIs) in India have long shown a preference for direct equities or shares over the more mainstream mutual funds. This choice is not arbitrary; rather, it stems from a calculated evaluation of the advantages that direct equity investments offer. For small investors aspiring to understand the nuances of wealth creation, it’s crucial to dissect these advantages and consider how they might align with individual financial goals.

Advantage 1: Control and Flexibility

One of the primary reasons why HNIs favor direct equities is the level of control and flexibility they afford. Investing in individual stocks allows investors to have a hands-on approach, enabling them to make decisions based on their own research, market analysis, and risk appetite. Unlike mutual funds, where fund managers dictate portfolio decisions, direct equity investors can choose their stocks, tweak their portfolios, and respond promptly to market trends.

Advantage 2: Customization and Tailored Portfolios

Direct equity investments empower investors to create a personalized and tailored portfolio. HNIs can strategically diversify across sectors and industries, handpicking stocks that align with their investment philosophy and risk tolerance. This level of customization ensures that their portfolio reflects their unique financial objectives, a luxury that may be constrained within the confines of a mutual fund.

Advantage 3: Potential for Higher Returns

While direct equities come with their share of risks, they also present the potential for higher returns. Successful stock-picking, timing the market, and astute decision-making can lead to substantial capital appreciation. HNIs often view this potential for superior returns as a driving force behind their choice to invest directly in shares, where the rewards can be more significant than those offered by mutual funds.

Advantage 4: Cost Considerations

Cost efficiency is another factor that weighs heavily in favor of direct equity investments. Mutual funds typically charge management fees, expense ratios, and other associated costs. On the contrary, investing directly in shares allows investors to avoid these layers of fees, potentially resulting in lower overall investment costs. For HNIs, who often manage substantial portfolios, minimizing fees can significantly impact long-term returns.

Advantage 5: Transparency and Visibility

Investing directly in equities provides unparalleled transparency and visibility into individual stock performance. HNIs can scrutinize the financial health, management practices, and growth potential of each company in their portfolio. This level of visibility fosters a deeper understanding of the investment landscape and allows for more informed decision-making.

CONCLUSION

While direct equity investments may not be suitable for everyone and come with their set of challenges, understanding the reasons behind the preference of high-net-worth investors in India sheds light on the potential benefits. For small investors, striking a balance between risk and reward, considering personal financial goals, and staying informed about market dynamics are crucial steps towards making sound investment decisions. Whether one chooses mutual funds or direct equities, a diversified and well-thought-out investment strategy is key to long-term financial success.

About Author

Vinayak Savanur

Founder & CIO at Sukhanidhi Investment Advisors, a SEBI registered equity investment advisory firm. He has nearly a decade of experience in the stock markets and has been a holistic financial planner.