In our previous articles, we have learned about mutual funds and their structure, types, working and also different asset classes. Today, we will focus in depth on one of the asset classes that a mutual fund taps into i.e. equity. The topic of today’s article is Equity Mutual Funds in India.
As mentioned before in our previous articles, equity as an asset class is a risky business but if one has the ability to understand the concepts and be disciplined in one’s approach, then the ups and downs of the equity markets should not have that much of an effect on the Outcome.
Equity Mutual Funds in India –
Let us now look at some of the main features of entering into equity through a mutual fund
1. Long run
The equity markets are mostly for those people looking to enter them with a view of never getting out. The idea is to remain in the market as long as possible owing to the volatile nature of the market. Nobody knows when the market is at its peak or when it is at its lowest, so the best bet is clearly to remain in the market for as long as possible to give oneself the advantage of averaging out the cost over the long term. In a mutual fund, however, one can get the added advantages of diversification, volume (economics of scale), and liquidity (for open-ended schemes), as well as the professional management of the fund by the fund manager, so that you don’t have to stay glued to the television daily to check the performance of the market.
2. Historic returns
Over the years equity as an asset class has beaten all types of investments due to its potential for high growth. But this also comes with high risk, as one may not understand the concepts of the equity markets properly. Rather than taking a huge risk by tapping into the equity markets directly (shares, private equity), one can easily obtain high returns through the mutual fund route as the risk gets diversified across a variety of stocks and one need not worry about the risk aspect. As for the returns, mutual funds invest the pool of money into the stock markets itself, so whatever are the returns of the market, the funds should usually provide similar returns and in some cases even higher returns.
3. Goal planning
As equity mutual funds usually give high returns, in the long run, one can easily target one’s financial goals with them and even link a specific goal to a specific fund.
E.g. Mrs A is considering the option of her child pursuing an MBA from a reputed college. The fees of the said college with its provisions and course fees is currently Rs. 10lakh. Mrs A knows that her daughter will be able to pursue this higher level of education only after 10 years, which means that the expenses then would not be the same i.e. the expenses would probably be double (20 lakhs) owing to inflation.
Hence Mrs A, can target a specific AMC’s Equity mutual fund and continue investing into it till the time her corpus has reached her desired goal.
As mentioned in our previous articles, mutual funds invest the pool of money into many companies thereby spreading the risk amongst all the companies that they invest in. However, many people may not know that every AMC has an inter-class diversification too, which means that within equity funds there are many options such as thematic equity, diversified equity, general purpose, tax plans, sector funds etc., All these categories have their own set of companies that they would invest into based on the working of the fund. Also, each of these funds would have different rates of return and the risk proportion would also differ slightly. Hence an investor literally has a lot of options to choose from, even within the asset class.
5. Methods of entry
As we know from previous articles, mutual funds allow investors to enter into the funds by two methods – i.e. through the Lumpsum mode or the SIP mode.
- Lumpsum – This is basically investing your money in large chunks. People at times have surplus money leftover after their targeted expenses and sometimes even after savings. This amount can then be used to invest in an equity mutual fund through the lumpsum mode as it would otherwise be left idle or in a Saving’s account, which would not generate as many returns as a mutual fund. Sometimes we may also receive amounts of money through gifts, during celebrations, festivals, bonuses etc. and if we have no immediate use for the said money, we can put this money into an equity mutual fund and let the amount grow over a period of time. However, one should also consider how much of the said amount should be invested into equity mutual funds as there is a risk of capital erosion i.e. the invested amount decreasing in value.
- SIP(Systematic Investment Plan) – this method of investing through SIP in a mutual fund is similar to that of a recurring deposit of a bank. Every month a certain pre-decided amount will be deducted from one’s bank account that has been linked to the Asset Management Company (AMC). This deduction will continue for a specific period of time, which has already been pre-decided by the investor. The longer the time a person keeps investing through the SIP method, the better the averaging of the cost of shares and thus there would be better returns. SIPs can be stopped and /or redeemed at the discretion of the investor. (Stop and redeem are not the same – refer to our previous articles). SIPs are useful in goal planning and individuals can link each SIP to a specific goal.
E.g. Buying a car may need 3 years of investment, so one can look at investing in the INVESCO midcap fund which can give a decent return in that period.
However buying a house may require a longer duration, say 10 years, in which case one may select a bigger and more renowned AMC like Reliance or Aditya Birla SunLife and choose their midcap funds as they have a better Average Return in a longer period of time.
Thus there are many advantages of investing in Equity and today’s article provides an in-depth view of investing in Equity mutual funds. The above features may be an advantage or in some cases a disadvantage (when Markets fall) to investors, but this should not be a cause for concern as mutual funds also invest in other assets classes and maybe the features of those funds would suit certain investors. So stay tuned for our next article on Hybrid Mutual funds.
About the Author :
Rufino Dsouza is a Certified Financial Planner who specializes in the following Services :
- Client wise portfolio management.
- Investment seminars.
- Investment solutions and goal planning.
- Tax planning, and effective investment tools for the same.
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