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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Why Mutual Fund NAVs won't double in a day?

Stock prices can double in a matter of days. But, mutual fund NAVs will "never" go up so fast.

Do you know why?

More importantly...
... do you think this makes mutual funds "inferior" to equity shares?

Here's the answer:

Why mutual fund NAVs don't go up as fast the stock prices?

A stock price represent just ONE company's share. So, depending on the floating stock and demand, it can quickly multiply your money.

NAV, on the other hand, is the average of 40-50 companies that a typical mutual fund scheme has in its portfolio. It is impossible for ALL these 40-50 stocks to simultaneously take-off in the "fast and furious" manner.

Consequently, it is impossible that a mutual fund's NAV would go up, as fast as a single stock.

Does this put a mutual fund at a disadvantage?


On the contrary, this makes mutual fund a far better choice.


If a stock can appreciate fast, it can depreciate too as fast. So, if you can make quick money in shares, you can lose it too in the blink of an eye.

Mutual funds won't go down so fast... because prices of ALL the 40-50 shares in the portfolio won't crash simultaneously.

Therefore, your investment in a mutual fund is comparatively much less turbulent than your investment in stocks (unless you too hold 40-50 stocks; which would be sheer madness... and tragedy... because it is impossible for an individual to efficiently manage such a gigantic portfolio).

Mutual funds too can double your money... of course, slowly... but surely.

Why is low volatility good?

When someone is making money quickly, it is impossible not to become Greedy.

When someone is losing money quickly, it is impossible not to become Fearful.

And, it has been proven innumerable times, that both Greed and Fear are bad for your investments.

Since mutual funds are much less volatile, you experience much less Greed and Fear. This, naturally, is good for your investments. Less the turbulence, less will your stomach churn; and hence, less the anxiety about your investments.

Thus, from the point of view of high stability and low volatility, mutual funds enjoy a huge advantage over stocks.

Does that mean a compromise on the returns?


Most of us...
... don't have sufficient money to create a well-diversified and balanced portfolio
... don't have the expertise and information to know which stocks to buy/sell and when
... don't have the time to regularly monitor our portfolio
... don't have the mental framework not to be influenced by the day-to-day noise

As such, it is IMPOSSIBLE that your portfolio of stocks has "only winners and no losers". 

So, remove the mental bias of focusing only on your profitable stocks — and "sincerely" calculate your overall returns. I can bet that your net returns would be far lower than the mutual funds. I think it is utter foolishness to believe that you can outsmart the professional fund manager. [Must Read: 'You think you can beat Roger Federer']

In other words, while you may miss all the excitement (and pain too) that comes from directly owning stocks, you will surely end up with a healthier portfolio through mutual funds.

So what is the sensible course of action?

You will definitely not suffer on the returns front... instead you would surely gain.

Besides, mutual funds in India are quite admirably regulated by SEBI and AMFI.

Moreover, over the last two decades, mutual funds have undoubtedly proven their worthy credentials.

Last but not the least, I don't think your objective is to become the best investor in the world. Rather, don't you want to make "good money" for yourself and your family... with minimum risk and minimum fuss?

If yes... there is no "better and simpler" route than the mutual funds.

But, of course, if you wish to be ranked among the Rakesh Jhunjhunwalas and Warren Buffetts, then you have to take the "torturous" path of direct equities.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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