Many people wanting to invest Rs. 50,000 keep asking ‘should I invest in direct equities or in mutual funds?’

The answer is very simple. Do an analysis of

a) cost of opening and keeping a demat account
b) brokerage – including the MINIMUM BROKERAGE per transaction
c) other costs associated with a transaction costs, etc.

When I did this last time, I realized that my minimum transaction size should be at least Rs. 35,000.

Assuming this to be true, the maximum number of transactions that you can do with Rs. 50,000 – is ONE. Or you need to sell it so that you buy a new share. That is a very inefficient way to ‘build’ a portfolio. It is almost impossible to keep buying and selling in the short term – especially if you wish to build a portfolio.

Also to buy and sell shares (assuming you need to be an investor and do positional trading) my estimate is you require at least about Rs. 10 Lakhs. I mean it could be Rs. 3L in 2014 leading to Rs. 10L in 2016, but till you reach that figure of investment, your portfolio will not get built.

How to build a portfolio? Well the Sensex has 30 shares representing say 13-14 industries. Your portfolio also has to represent that many industries – Oil n gas, banking, technology, infrastructure, energy, pharma, fmcg, etc. Assuming you buy one or two shares in each of these industries you will be able to build a portfolio. Till then what you will have is an assortment of shares looking like a portfolio.

My suggestion is simple. Invest in an index fund. Create an IDEAL portfolio and track your own performance vis a vis the index. Buy one or 2 shares of your ideal portfolio every year. See how you perform a) in the imaginary portfolio and b) in the real life portfolio.

Over a 3-4-5 year period see which is doing better? If it is your own portfolio, apply for a job in the fund management industry. If it is the index fund, kill your ego and invest in an index fund.

If your imaginary fund is doing much better than your real life fund, realize that RISK HAPPENS ONLY WHEN YOU DO, not when you dream.

Happy investing.