In the world of wealth creation, stock markets are often portrayed as a golden highway to riches. The lure of high returns, the thrill of stock picking, and the dream of discovering the “next big thing” can be tempting.
Let’s be honest – investing in individual stocks isn’t easy.
Selecting the Right Stocks: Few Key Points to be Noted
Thinking from an investor’s mindset, you will first need to understand the fundamental aspects of the industry/sector, how the company is positioned among the peers, is it a B2B or B2C model, what can impact the future growth and profitability, the promoter’s vision and skin in the game and many more points. Once it qualifies, then understand the balance sheet, ROE, ROCE, PAT, and some important financial ratios like PE ratio, EPS, interest coverage ratio and the list doesn’t end with this. You will also need to monitor global and domestic macro trends, geopolitical impacts on the business and many more parameters to make the best out of the selected stocks. And all these needs to be done on a regular basis (as earnings are announced every quarter).
In this age of social media noise, you need to ensure these short-term news and narratives do not influence your decision and turn you from an investor to a trader or speculator. You need the temperament to handle extreme volatility and the discipline to avoid panic in market downturns. This makes it very important to jot down your initial thoughts on what made you invest in a particular company, revisit every time when you are tempted to exit/add more to ensure your decision is rational and not biased.
All these require a lot of time, effort, and deep due diligence. Even then, things can go south. Greedy promoters can manipulate books or siphon off funds. Corporate misgovernance can destroy shareholder value overnight. Operational inefficiencies, poor risk management, sudden regulatory changes or political or geopolitical situations can ruin well-known names.
Real-World Examples: When Companies Let You Down
Remember, stocks don’t come with seatbelts. History is full of examples where companies—some of them once market favourites—ended up destroying not just shareholder wealth but investor trust:
- Enron (USA) and Satyam Computers (India) were classic cases of large-scale accounting fraud.
- Kingfisher Airlines promised luxury in the skies but crashed under mounting debt and poor financial discipline.
- Gitanjali Gems (Mehul Choksi), once part of the glitzy diamond retail boom, collapsed under a massive banking scam.
- Yes Bank which faced an acute liquidity crisis, involved a pattern of risky lending, underreported NPAs, alleged money laundering & kickbacks with the involvement of the co-founder.
- IL&FS, a shadow financier, fell under the weight of poor governance and unsustainable leverage—causing ripples across the entire financial system.
- IndusInd Bank recently faced sharp scrutiny, and a stock price decline due to concerns over internal systems and failure of checks and balances.
- The most recent case of Gensol Engineering is another example of alleged fund misappropriation and financial falsification by the top management. A reminder of how quickly sentiment can turn when there’s a whiff of doubt about corporate disclosures or ethics.
In each of these cases, aspirations were crushed, and investor capital was wiped out (or reduced to penny). Retail investors who were heavily concentrated in these names bore the brunt—some lost years of savings in just a few days or weeks. Even if we take the above few examples as exception, sometimes changing market dynamics have even kept the stock prices of stalwarts of market like HDFC, ICICI, Reliance, Asian paints, HUL and the IT giants on a sleep mode for years together due to multiple reasons.
Betting big on individual stocks come with its own pros and cons. The rewards can be high if things go right but it can be equally punishing if things turn unfavourable. But if you’re depending on direct stock investing to meet your long-term goals—like your child’s education, your retirement, or buying a home—it’s time for a reality check.
Mutual Funds: Your Seatbelt in a Fast-Moving Market
Now, consider how Mutual Funds handle such situations. Most well-managed funds follow rigorous internal checks, have access to early warning signals, and act swiftly. If a company like Gitanjali or IL&FS starts showing signs of trouble, fund managers typically reduce or exit the position partially or entirely – shielding investors from catastrophic damage.
Even if a fund had a decent allocation to such a stock in a portfolio typically ranging from 20-100 stocks, its impact on your investment is minimized due to diversification. In contrast, a direct stock investor will lose away the entire money invested in a single bet. The difference in outcome in both scenarios is crystal clear.
Direct Stocks or Mutual Funds: Decide Based on Your Reality
As an investor, you must ask yourself: What’s the main purpose of investing in stocks?
You’re already a specialist in your field—maybe a doctor, lawyer, IT professional, or business owner. Today, you come across so many social media posts promising that you, too, can become a stock market wizard and make money by simply attending their classes. The fear of missing out (FOMO) kicks in. You hear colleagues making money, and you think, “Yes, I can do this too.”
Whether it’s driven by curiosity, the DIY mindset, or a genuine passion for the art of investing — it’s important to pause and ask yourself this key question at the very beginning. In fact, you should keep asking it regularly throughout your investing journey. Jumping in with a “let me try” mindset might not be the best approach for wealth creation. Investing isn’t a casual hobby. It’s a discipline, and your objectives for starting matter the most.
As a professional or a salaried individual or an entrepreneur, you are expert in your area of work which is helping you to earn money. The underlying reason of investing is to efficiently create wealth from your hard-earned money.
Gold as an investment gives a decent inflation beating returns. Similarly, real estate also has a strong history of generating sizeable returns. Under equity, you have the option of investing in direct stocks, mutual funds and PMS (minimum ₹ 50 Lakhs).
If the intent is to generate good returns from capital market, then mutual funds are the best suited products with a reasonably lower expense. Historical data proves that people who have stayed invested for long term (above 8-10 years) in any diversified mutual fund have made decent returns with highest liquidity.
But if the intent is to generate returns that can beat mutual funds and PMS, then it is worth venturing into direct stocks provided you have the skill and time. Giving it a try along with your regular work which is getting demanding day by day will not add any value to your long-term goals.
Conclusion: Focus on Goals, Not on Jackpots
It’s one thing to dabble in stocks with a small portion of your portfolio for learning or excitement or to feel gratified with the feeling – “I own this stock”. But when it comes to your serious long-term goals, depending heavily on direct stock investing can be extremely risky—and at times, disastrous.
Mutual Funds offer a prudent, process-driven, and time-tested way to grow your wealth, with lower stress and better sleep at night. More importantly, mutual funds enable you to focus more on your primary source of income – your job or profession.
Choose wisely. Your future deserves more than a stock tip.
Shreedhara is the Founder & Director of Ara Financial Services Pvt. Ltd. He has an experience of over 2 decades in Financial Service Industry with majority of it in guiding individuals and institutions on their investments requirements.
