Investing in equity shares can be as easy as paying your money in mutual funds, but it is good to know some technical points. You give money to a mutual fund that invests in equity shares on your behalf, where you also get a profit or loss. There are specific strategies involved, but this is a crucial feature of investing in mutual fund schemes for equity. However, as a long-term shareholder, it helps to learn more about how an equity mutual fund operates. Let’s see what they like.
Investment purpose: Many equity funds need to be categorized by your investment objective, mapped to your risk profile. While capital appreciation is the investment objective of all equity funds, it is the risk taken to achieve this goal that varies. It also depends on the type of stock in which the fund will invest.
It can be based on stock capital capitalization such as large-cap, mid-cap small-cap, which is less risky (volatile) than mid-cap small-cap compared to the latter.
The objective may also be to invest in industries called diversified equity funds in market capitalization and a mix of stocks. Another objective tax-saving may be known as equity-related savings schemes or to invest in specific sectors or disciplines such as banking (industry) or infrastructure (themes) or foreign equity.
Investment plan or style: The investment strategy adopted by the fund house should also be known to you as an investor, which means the technique used to take stock. Top-down strategy, bottom-up strategy, price strategy and growth strategy are the primary investment approach or style.
Asset allocation: While most equity mutual funds are close to being fully invested in equities, some may consist primarily of equity (at least 65 percent) and the rest are allotment of debt or allocation of domestic and international equities. It is essential to look at asset allocation from a tax efficiency point of view, as per the existing provisions of the Income Tax Act, 1961, equity funds are for household average with an annual average allocation of 65 percent. Consequently, international equity funds with a majority allocation of foreign equity are known as income tax debt funds.
Expenses: Last but not least, it is essential to understand that you are also charged for investing in mutual funds. While this may be true for investing in any mutual fund scheme, investors in equity mutual funds are paid more than investors in other asset classes. In short, higher fees, more volatile asset classes. For example, equity funds will have higher fees than bond funds.
After thorough research, equity mutual fund schemes pool the money and invest in equity securities. Nevertheless, it is vital to know the fundamentals of how equity funds operate. It involves understanding the intent of the equity fund and matching it to your risk profile. It is followed by the capital distribution and investment strategy of the fund. Last but not least; you should also identify the fund’s expense ratio as it may have an impact on returns.
You can classify equity funds based on their investment objective and the stocks and sectors in which they invest.
Sector-based and thematic – This category includes equity funds that focus their investments on a specific area or subject. Sector funds are invested in a particular industry such as FMCG or a subject such as pharma or technology. Themed funds are carried forward to new retail companies or international stocks.
Because sector funds and thematic funds are based on a specific sector or theme, they are riskier. It is due to both sector and market risk due to their performance, yet, in terms of market capitalization, business and thematic funds may diversify.
Market capitalization based –
Large-cap equity funds: Generally, well-established large-cap firms make them stable and reliable investments in large-cap funds.
Mid-Cap Equity Fund: They are an investment in medium-sized companies.
Small-cap investing: Small-cap funds offer volatile returns because small companies are subject to uncertainty.
Mid-and-small-cap funds: In both mid-cap and small-cap funds, some funds invest.
Multi-cap funds: equity funds that invest in large-cap, mid-cap and small-cap stocks through market capitalization are referred to as multi-cap funds.
All the funds listed above follow an effective management strategy in which the fund manager decides on the structure of the portfolio. However, there are funds whose portfolio structure imitates a particular index.
Equity funds after the standard benchmark are called index funds. These are passively managed funds that form the parameter that the fund represents, investing in the same companies in the same proportion.
For example, in all 30 SENSEX firms, a SENSEX index fund will invest in the same proportion in which the companies are part of the index. Index funds are low-cost funds, as they do not require active management of the fund manager.
Investment benefits in equity funds
Several benefits of investing in mutual funds:
- Professional money management
- Systematic investments
- Low Cost
The main advantage of investing in an equity fund is that you do not have to think about selecting stocks or sectors to invest. Successful investment in equity requires a tremendous amount of research and knowledge. Once you invest in it, you should dig deep into the financials of a company.
You also need to understand how it is expected that a particular sector will perform in the future. All of this, of course, requires a lot of time and effort that most common investors don’t have. Therefore, the solution is to leave the stock-picking by investing in an equity fund to an experienced fund manager.
How an equity fund works:
An equity fund invests at least 60% of its capital in various percentages of companies’ equity shares. It should be combined with the investment mandate of the company. It can be purely large-cap, mid-cap, or small-cap investment or market capitalization combination. The investment style can be value-oriented or growth-oriented.
After allocating a large portion of equity shares, the remaining amount will go to debt and money market tools. It is to take care of unexpected demands for redemption and reduces the level of risk to some extent. The fund manager decides to buy or sell to take advantage of market dynamics and total returns.