Equity Mutual Fund
Mutual fund is the best way to expose ourselves to equity if we are just getting started with equity investing.
Choosing the proper business to invest in is a difficult task. Another hardest part is ensuring that your investment generates the desired profits.
When you invest in a mutual fund, the fund manager takes care of these two key concerns. The mutual fund manager ensures that a company is extensively researched to see whether it is a worthy investment, and it will provide us with the desired returns.
Instead of buying stocks or equity on our own and putting together a portfolio of different investments, we can invest in equity mutual funds and allow a fund manager to do it for us for a small fee.
If we are new to equity investing, we can see why an equity mutual fund is a better way to invest in equity. Let's learn more about equity mutual funds now.
Equity mutual funds are classified based on a range of criteria.
Market Capitalization:
Major classification is on the criteria- Market Capitalization. We don’t need to get into the details of market capitalization now, but know that market cap(shorter for market capitalization) indicates the size of a company. If a company is mentioned as large cap, it means it is a company of large scale in the market. A medium cap company is a medium-sized one, and a small cap would be a small company.
Based on this, Equity mutual funds are classified as Large-cap mutual funds which invests in Large cap companies, Medium-cap mutual funds which invests in Medium cap companies and small-cap mutual funds which invest in small companies.
Large cap companies are usually the market leader companies, which are doing business from a long time and have a solid proven track record. More mature and stable. The usual notion is Large cap companies can withstand any market downfalls due to external events like politics. So, large cap funds are considered to be less risky relative to mid-cap and small cap funds.
Medium cap and small cap companies are relatively small in comparison to a large cap company. But these companies are more susceptible to changes or big downfall in market, especially the small cap companies. So the order of risk for these funds in increasing order would be large cap funds, mid-cap funds and small cap funds.
The trivial part would be the return with respective to the risk. Since Mid-cap and small cap companies have much bigger chance of growing big and become a large cap in the future, the reward of investing in them might give us a higher return than investing in large cap companies.
For an analogy, it is easier to go from 1 to 100 than go from 100 to 1000.
Hence, you are better off with large cap mutual funds if you don’t want to risk your money much, and you are fine with moderate to above-average returns.
If you are willing to risk more and don’t mind losing money for higher return, then Mid-cap and small cap mutual funds are for you.
Sector
Equity funds are also classified on sector/industry like Technology, Pharma, Banking, FMCG(fast moving consumer goods) and others. These type of equity funds have the same sectoral companies clubbed together. A banking sector fund might contain ICICI, HDFC and SBI.
If you are in a particular sector, and you have some expertise in that sector, then you might know a lot of first-hand information before a lot of people and might know the nitty-gritty of the sector thoroughly. You can invest in that as a whole and make profit out of your knowledge.
But if you don’t have enough knowledge, or you are not an expert in a particular field, then you must stay away from sector funds.
If you don’t know what you are doing in investing, then it is puring speculation or betting.
Sector funds might look like an enticing offer to take, but they are risky. They don’t cover the broader view of the industry. So don’t mind skipping the sector funds.
Open-end and Close-end
The last major classification would be Open-end fund and Close-end fund. In an open-end fund, you would let investors buy and sell a fund forever. A close-end equity fund has a fixed time frame. You are locked in for three to five years investing time.
You can invest in an open-end fund at any time and exit on your wish. While that’s not the case with the close-end fund. You have to be in the close-end fund from the start to the end.
Always choose an open-end fund over a close-end fund. We should have the flexibility to enter a mutual funds and exit on our will and also for the open-end funds, we can see the past performance of the fund before investing.
We will continue the other details on equity mutual funds in the next edition. We will look into other mutual funds related to equity - ELSS (Equity linked savings scheme), Balance Funds and also look at the options available in a mutual fund - Growth, Dividend and Dividend reinvestment.
Until next time,
Peace out!