Mutual Funds v/s Stocks Portfolio #MutualFundsSahiNahiHai. By design, mutual funds have inbuilt limitations which ensure that they will never be able to protect investors' capital in a recession. Read this article to find the glaring inbuilt faults in mutual funds and save yourself from the hype created by mutual funds industry. This article is the real one in interest of investors - we hope investors can differentiate between facts and promotional hype. Trikaal’s Stock Portfolios (or even your own personally managed) Mutual Funds Markets are not always going up. When it becomes clear that market and our stocks have become excessively priced, we can exit partly or even fully, protecting us from future losses. This is NOT possible in mutual funds. As per SEBI rules, ALL equity funds have to maintain at least 65% equity at all the times. So, even if a fund manager knows that markets will fall for long period of time, he can sell only 35% of his portfolio stocks and COMPULSORILY has to suffer loss on 65%! It was one of the key reasons that ALL the equity funds had fallen up to 80% in the crisis of 2008. We have a strong advantage that we can buy any stock even if it has very small market cap. That gives us more options to select from – that directly means more profits. A mutual fund having funds of say 20,000 crores cannot even think of buying a stock with small market cap. This leaves it with very limited opportunities, which means limited returns. This is the practical hindrance in mutual funds, because of which professional individual investors earn much more return compared to a fund. We have full flexibility in investing, we can buy any stock from any sector, any industry. Mutual funds are bound to invest only in those stocks which fall into their fund objectives, like an infra fund cannot buy a pharma stock. So you may end up investing in large number of funds to diversify, that nullifies your ability to get higher returns. Because if you invest in too many funds, the average returns will be low. Stock selection needs expertise But now even mutual fund selection is difficult because there are so many of them. Stock selection becomes possible because we can analyze a stock. But mutual fund selection is difficult based on its stocks. First of all every fund has 20-40 stocks which makes it next to impossible to analyze them. Secondly, the fund may change the stocks any time, so you cannot study them based on their current holdings. Just one portfolio of 20-25 companies is optimum for any large fund. If you invest in say 10 funds, that means you have invested in nearly 200-400 stocks! That means the proportion of each stock in your portfolio is JUST about 0.5 to 0.25%. Even if a stock rises by 100%, its impact on final result will be a negligible 0.50 – 0.25%!!! That is why the people who invest in multiple funds never get market beating returns. It is only because of these so many weaknesses of mutual funds that successful investors prefer personalized wealth management.