Two friends who are medical students, want to invest in stocks. One friend, Ade, having read a few finance articles believes he had grasped the idea well enough to commence his long-term investment journey.
However, the other friend Tunde, who knows he’ll be too preoccupied to follow up with all the investment strategies and news required to ensure his investment attains his intended objective, simply signs up for an equity fund. Over the course of the investment journey, Ade learns a lot.
However, he spends more of his time trying to understand financial concepts that are otherwise alien to him and is oftentimes overtaken by the emotions of greed or fear depending on which side his investments tilt to.
With no experience, he makes impulsive investment decisions and changes his investment strategies based on news and information available. As a result, the investment process becomes a burden to him and soon enough, he dumps the entire idea.
Tunde, on the other hand, who had been wise enough to understand his limitation and invested in an equity fund, not only attained the objective of his investment by allowing professionals to handle the decision making process, he also did so with ease.
There are two ways in which you can invest in the capital market. The first is the direct approach like Ade’s where you reach out to a broker or brokerage firm by yourself, and handle the buying and selling based on your own free will.
The second method is to use an investment firm that focuses on helping you attain your objectives based on your investment mandate – that is the details of your investment objective, risk threshold, etc.
Now, there is nothing wrong with either method but an understanding of what both entails will help shape your choice of procedure.
Needless to say, an equity fund has its merits in their numbers and this is what we would assess for the rest of this article.
What Is An Equity Fund?
An equity fund is pretty much a type of mutual fund that focuses on investing in equity stocks. A mutual fund is an investment vehicle made up of a spectrum of funds collected from many separate investors in order to invest in securities such as stocks, bonds, money market instruments, and similar assets.
Mutual funds are operated by professional fund managers, who invest the fund’s capital and attempt to create capital gains and income for the investors. One of the main advantages of mutual funds is they give small investors access to professionally managed diversified portfolios, bonds, and other securities.
Each shareholder, therefore, participates proportionally in the gain or loss of the fund.
An equity fund as a subset of mutual funds involves the buying of ownership in businesses, usually in the form of publicly common stock. Equity fund primarily deals with investing principally in stocks. Hence, the reason it can also be referred to as a stock fund.
The usual denominator with equity funds is the desire for fund managers to discover good opportunities to invest in businesses that will grow in value. This is different from a bond fund or fixed income fund, which involves using shareholder money to make loans to companies or governments and collects interest income.
The size of an equity fund is determined by market capitalization, while the investment style reflected in the fund’s stock holdings, is also used to categorize equity mutual funds.
Equity funds are also categorized by whether they are domestic or international. These can be a broad market, regional or single-country funds. Some specialty equity funds target business sectors, such as health care, commodities, and real estate.
Main Types Of Equity Funds
There are essentially different types of equity funds and they come in different forms depending on the objective of the fund, the industry being invested in and more. A breakdown of the equity fund types, however, according to Arpit Chandak includes the following.
Large Capital Equity Funds
Large Capital Equity funds are funds that are invested in large companies. These companies are stable, having spent a number of years in the industries they function in and are great for meeting the needs of dividend or income investors. These funds do not mean that they invest in only equity funds. Rather, it means that they invest large portions of their capital in companies having large market capitalization or Large Cap equity funds. These funds provide sustainable returns and stability to investors.
Mid-Capital Equity Funds
Just like the above, these funds focus on medium-sized average sized companies. These funds provide a moderate risk to investors and offer a balance of growth in value and dividend provision.
Small Capital Equity Funds
In these types of equity funds, the fund manager invests a major portion of the investors’ money in stocks of companies having low market capitalization. These companies are essentially high growth stocks and are great for investors willing to invest in the long term towards harnessing growth.
Multi Capital Equity Funds
These funds are used to minimize the risk and diversify the investment. In these funds, capital is invested in companies across different sectors and across different sizes of companies.
Thematic Equity Funds
When mutual fund invests in stocks of companies in a specific sector such as Banking, IT, Pharmaceuticals, etc., these funds are called thematic or sector equity funds. The performance of these funds depends on the performance of a single sector. These funds provide high risk and return to investors.
Balanced Funds
In these funds, the major part is invested in stocks but a certain part of the money is invested in debt securities to limit the risks. These funds are known as hybrid funds. They are considered ideal for first-time investors who want to invest in the stock market and at the same time keeping the overall risk level low.
Equity Linked Savings Scheme
These funds provide tax savings to the investors and hence most popular among them. But these funds have a lock-in period of 3 years. Investors cannot redeem their money before the maturity date.
The Main Advantages Of Equity Funds
Regardless of the type of equity fund you choose to invest in, there are many benefits accruing to the investor. They include the following:
Convenience
In truth, having an equity fund can make you relatively passive and the idea is that you can explore the full extent of the stock market without having to worry so much about the operational dealings that come with it. Just like our example, there is a sort of ease that comes with knowing your investment is in good hands and will yield the intended objectives for which it was set up for without having to break as much as a sweat.
Capital Growth
This is ultimately and primarily what stimulates the interest of every investor. Equity funds are efficiently one of the best financial instruments that can offer returns to help investors beat inflation. Supposing the prices of stocks increase, investors are able to see this as a profit or an appreciation in their capital. Hence, as an appreciation in their capital, a sizeable amount of money can be accumulated by investors over the long-term through investments in equity funds. Generating and growing capital is one of the primary benefits of equity fund investments. As a company develops and makes a profit, it usually reinvests the profit to grow through increasing market share, product developments, etc. With the increasing growth of the company, the market price of the stock increases, leading to capital appreciation for the investors.
Diversified Portfolio
You get an exposure to various stocks when you are invested in equity mutual fund schemes. It is like killing different birds with one stone; or put better, putting eggs in different baskets. That is, you buy stocks at separate companies at different times or in different sectors. This can be helpful because if one stock drops, another can make up for the loss. This is what diversification of your investment portfolio is all about.
Easy to Liquidate
As an investor, it won’t be a problem liquidating your stocks or assets. Stocks are traded around the world every day, so this makes them highly liquid investments. Thus, this means that you can sell your stocks whenever you want to, offering you an opportunity to redeem your investment at any time. This liberty of investing and redeeming gives you better control over your investments.
Professional Management
Investments are bound to involve risks and uncertainties. Investors are usually charged with dilemmas on the matter of what to do in particular and how to do them. This is usually due to insufficient knowledge or investing experience. Going into an equity fund, there are certain professional provisions made to tackle challenges as these especially in relation to business risks and uncertainties. Experts are provided to effectively manage the business affairs of an investor in order to curb challenges and avert future risks.
Dividend
This is a benefit that resides majorly on the part of the investor. By investing in a company, a regular income is provided for the investor in the form of dividends. Whether the particular business is booming or not, an investor gets paid. However, when there is a diversified portfolio by which a business is run, there should be a steady regularity in the generation of income throughout the year.
As long as you are part of a professional equity fund, these benefits and more will accrue to you.