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What is Equity Mutual Fund for You

 Deepak Singh  14-11-2017   06-12-2017

 Equity Mutual Funds are focused towards long-term financial growth through capital gains instead of relying only on the dividends. 

Today’s generation is hyperactive. This statement holds true even when it comes to financial decisions. It is completely accepted in our society that each person wants to grow richer and richer. It is essential to wisely plan and adopt a secure route to financial freedom and luxurious living with the fulfillment of dreams.

A mutual fund is a way of investment into stocks, bonds and other different asset classes in which the investment is driven by strong assessment by industry experts. The initial purchases are typically made on the funds’ current net asset value (NAV), which keeps fluctuating in accordance with fund holdings. This brings about the fluctuation in scheme returns.

Equity Mutual Funds are focused towards long-term financial growth through capital gains instead of relying only on the dividends.

Key Factors influencing Equity Mutual Funds:

 No matter how much expertise of financial experts is involved in market prediction, it demands one’s attention of certain factors to peacefully handle the outcomes of investing in equities. Below is the list of some of the key factors:                            

a) Risk: Despite the best analysis, it is never synonymous with zero risks or stake. Hence one needs to spend some time diligently over the trends and market analysis to minimize the risk of losses in the portfolio. Moreover, the business success also depends on a large number of external factors. These external factors have an immense business impact, and hence the risk analysis is never straight and simple. It is for this reason that one should always build a portfolio while investing in stocks and mutual funds. It’s time not to ignore the statement, "Mutual Fund investments are subject to market risks, Read all scheme related documents carefully".                 

b) Return: There is a big majority in the investors’ community who is not a wizard with investments and bears a very naïve understanding of the stock market. That is why these people get attracted and decide to invest in haste without any personal assessment. Their criterion for deciding upon investment for great returns is someone’s comment on a particular scheme or a great portfolio of their friend or colleague. It is even possible that they come across an attractive article and that was enough to trigger their investment. If your risk-taking capacity is a little bit low, it is better to familiarize oneself with the basics of financial investing. One should focus on financial growth instead of relying on false commitments made by many brokers for stupendous returns in short duration.

c) Better Life, if used for Long tenure:

Even if you have decided to get into equity mutual fund for better returns, do not refrain from the lock-in period which comes in with them. Lock-in window in Equity Linked Savings Scheme (ELSS) is a unique approach in the field of equity investing.

The studies reveal that if we compare holding period return for long, and short periods, we’ll understand the difference in returns that can be drawn with long-term investment. This overcomes the short-term volatility of stock prices and also safeguards any temporary hiccups.

d) Tax efficient: Many people are interested in investing only that amount in equity mutual fund which gets them the desired tax saving benefits. However, tax saving with lesser returns or facing losses because of a wrong pick can never be an enjoyable experience. In addition to the tax benefit, one should focus on good return on investment. This can be effectively handled by building the portfolio slowly over time while paying attention to details. As per tax policies, the taxation varies with capital gains and is different for short-term and long-term holdings

e) Review - Daily v/s Periodic: Many people make the investments to fulfill their immediate requirements and forget them after that. However, it is quintessential to have a periodic review of your financial portfolio of mutual fund investment which will help you with a clearer understanding of what’s happening in the stock market and what to expect from your portfolio. The daily review is not recommended by market experts because that leaves you vulnerable to daily ups and downs and adds no value to your understanding. At the same time, investing in equities and not review it over a long period assuming that it will automatically give decent returns over the ‘long-term’ is not justice to your investment. Make it your habit to monitor your portfolio regularly, and you’ll cherish financial security with good planning of your savings.

g) Types of Equity funds - Diversified Fund

A diversified equity fund is a type of equity fund where investments are made in companies regardless of their size and sector. These investments are solely made from the perspective of maximizing gains. This category of equity funds is typically offered and promoted by ULIPs (Unit Linked Insurance Plans), mutual funds and other investment firms. Some of the major categories which are popular in the investment sector are:

  1. Index funds: Index funds are designed to track a specific market index like the S&P CNX Nifty or the BSE Sensex. These funds focus on offering returns similar to the defined index which acts as a benchmark. The investments are made in stocks which are part of the index. Moreover, the same proportion as the index is also maintained.
  2. Large-Cap funds: The investment in these funds is done in companies having large market capitalization. Being tycoons in industry, these companies are part of important stock indices like Nifty 50, BSE Top 100, BSE Top 200, etc. With their ability to survive bad market and unexpected economic crises, they are accounted for in terms of safe mutual fund investment. Many financial advisors strongly recommend investing in large-cap funds instead of mid-cap investments.                                   
  3. Mid-Cap funds: As denoted by their name, the mid-cap funds are investments made in mid-sized companies. These companies are most liable to witness phenomenal growth in comparison to their large-cap peers. These are anticipated to get very high returns during the bull market phase.                        
  4. Small-Cap funds: Small-cap funds invest in smaller firms. The appreciation on investments is anticipated but the risk associated is equivalent to the growth prospects. The uncertainty of returns from any small-cap fund investment is very high. During a bull market, the small-cap fund can possibly outperform other fund categories. But the same holds true for falling drastically in a falling market. Hence it is only an option worth considering for those who have the risk bearing capacity and very high appetite for growing rich faster. Still, one should not invest more than 10% of their portfolio to manage risk with ease.                   
  5. Multi Cap funds: Though counted amongst the most common form of investments, these funds do not follow any asset allocation or investment strategy. They choose any type of company irrespective of its market capitalization and sector. These funds are good wealth creators since these investments are made by exploring utmost and diverse investment opportunities without restricting to major factors as in other diversified funds.                                 
  6. Sector Funds: In sector funds, the investments are confined to the investments within a single sector. The primary sectors in which these funds are active include FMCG, pharmaceutical companies and healthcare, Information Technology and financial services. Typically, they are less diversified because they are restricted to a particular sector. The risk involved is very high and sector-specific. 
  7. Thematic funds: Thematic funds offer an altogether different flavor to those who are involved in mutual funds. Their key objective is to deliver optimal returns by investing in stocks qualifying a particular theme. A fascinating feature of thematic funds is that they are based on a particular theme. The theme could be anything from being multi-sector to international exposure to community exposure. These have a very broad spectrum to operate in but are also exposed to high risk and volatility. One needs to be cautious when investing in thematic funds since they are usually mistaken with sector funds.

Hence, no matter how good or average you are with your knowledge of mutual funds and the stock market, it is essential to get knowledge and be clear about the terms so as to enjoy real financial growth and benefits from investment.

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