One place where you can always find the definition of money
is a dictionary. But one place where you can invest your money for earning a
long-term profit is equity mutual funds.
With Equity mutual funds, you will not only find money, but will also
have the capacity to spend for yourself and family. To begin, you must be
thinking that you definitely know the word equity and mutual funds is where you
must invest to save tax every year. So how does these two combine? Hence, let’s
start by deep diving on equity mutual funds.
Equity Fund is a mutual fund that invests principally in
stocks or shares of companies.
Management of equity mutual funds can be done either
actively or passively.
While managing an active fund, the fund manager needs to
scan the market, conduct research on companies, scrutinize performance and
keeps an eye on the best stock to invest.
For Passive, the fund manager puts together a portfolio
which is similar to popular market index i.e. Sensex or Nifty Fifty.
TYPES OF EQUITY FUND
There are many types of Equity funds which can be further
categorised based on their investment mandate and the kind of stocks and
sectors they invest in.
Equity funds can also be classified as domestic or international
which can be broad market, regional or single country funds.
To name a few equity mutual funds, details are mentioned
below:
A) Basis Market Capitalisation:
Equity funds are also divided basis market capitalisation
i.e. how much the capital market values the equity of an entire company. They
limit investments to Micro Cap, Small Cap, and Medium Cap, Large Cap or
mega-cap companies.
Large Cap equity funds belong to large-cap companies which
are well-established companies and hence, these are reliable plus stable
investments.
They primarily invest in large-cap stocks of the biggest
listed companies of the economy.
Mid Cap equity funds and Small Cap equity funds belong to
midsize and smaller companies respectively. Additionally, one can always invest
their funds in both mid cap and small cap naming them as mid-cap &
small-cap funds
The returns are fluctuating due to volatility in smaller
companies.
Multi-cap funds are
equity funds that invest across market capitalisation which is in large, mid
and small cap stocks.
B) Basis Sector and Themes:
Further classification for equity mutual funds is
diversified where the scheme invests in stocks across the entire market
spectrum or Sectoral /Thematic is restricted to only a particular sector or
they say infrastructure or theme.
Sector equity mutual funds particularly invest in one
industry i.e. Pharma/FMCG /Technology.
Thematic equity mutual funds are those following a
particular theme like emerging consumer companies or international stocks.
Since these are concentrated in particular sector, they tend
to be riskier than diversified equity funds.
C) Index Funds
Equity funds that follow a particular index are called index
funds which are passively managed funds that invest in the same companies in
the exact same proportion that make up the index that fund follows.
For example, a Sensex index fund will have investments in
all 30 Sensex companies in the same proportion in which the companies form part
of the index. Index funds do not cost much as they don’t require to be managed
actively by the fund manager.
Equity fund essentially invests in company shares and aims
to provide the benefit of professional management and diversification to
ordinary investors.
HOW DO EQUITY FUNDS WORK?
It’s actually pretty
simple; you give your money to a fund which invests in stocks. There will be
gain or loss which will accumulate to your account. This is the bare minimum
information that one needs to invest in equity mutual fund.
The word mutual in the name exactly means what it indicates,
i.e.it is composed of the money that a huge number of people have invested and
the way law, rules & regulations have designed is that all investors are
exactly equal financially and are treated the same way.
The way this fund is designed is that an equity fund invests
60 percent or more of its assets primarily in equity shares of companies in
different proportion as per the investment mandate. This investment might be in
any variety of mutual funds i.e. large or sectoral with variation in investing
style as value or growth oriented.
After investing a major portion in equity shares, the
remainder amount might be invested in debt or money market instruments. This
investment will also help in redemption requests raised by the investors.
The fund/portfolio
manager will keep buying or selling particular stocks to take advantage of
changes in a dynamic market.
The expense ratio of equity funds changes due to regular
buying and selling of equity shares. The current upper limit of the expense
ratio is at 2.25% fixed by SEBI for equity funds and they plan to further
reduce it. An investor will always look for the equity fund that has low cost
as measured by expense ratio, lack of sales overload and has little or no
turnover in the underlying portfolio.
WHO SHOULD INVEST IN EQUITY FUNDS?
An important decision that each investor needs to be crystal
clear is that to invest in equity mutual fund or stocks direct.
This decision is to be guided by risk appetite along with
the length and breadth of your investment portfolio. Ideally speaking, any
investor who isn’t looking for relatively short-term isn’t suited for equity
mutual fund. Equity mutual fund benefits the most for those who can stay
invested for 5 plus years or more.
Another way to decide is by rupee cost averaging into a
low-cost equity fund over long periods of time, reinvesting of dividends and
then regularly going through up and down of stock market until one retires.
As a salaried employee, one can save tax under Section 80 C
of Income Tax Act by investing in ELSS,
which are regarded as the most appropriate because of the shortest lock-in
period of 3 years and provides higher returns.
If you are starting fresh in the stock market, large-cap
equity funds are an appropriate choice since these funds invest in equity
shares of the top 100 companies of the stock market and provide stable returns
in the long term.
As an experienced investor, you may look at investing in
different equity funds who invest in shares of companies across market
capitalisation which provide a combination of high return and less risk, as
compared to equity funds who invest only in small cap or mid-caps.
BENEFITS OF INVESTING IN EQUITY FUNDS
·
Expert Money Management
·
Low Cost
·
Convenience
·
Diversification
·
Systematic investments
·
Flexibility
·
Liquidity
·
Tax
One of the huge benefits of investing in equity funds is one
doesn’t need to worry about choosing the right stock and sectors to invest
which, of course, requires a lot of research and study of company financials.
On an average, the performance of equity funds in India have generated pre-tax
returns in the range of 10 to 12 % which fluctuates as per the economic and
market dynamic changes.
Do remember the golden rule that those who have the gold
will make the rules and hence, choose wisely to dig your gold on equity mutual
funds.
No comments:
Post a Comment