In our previous discussion on debt mutual funds, we examined the least risky forms of investment. Now, we will delve into equity mutual funds, which are a popular choice among majority of people who are new to investing or people who are pre occupied with their work life.
Equity mutual funds are a type of investment scheme that contains a basket of stocks/shares of multiple organizations. These funds are managed by an experienced fund manager. These funds offer investors the opportunity to diversify their portfolio and potentially earn higher returns, as stocks historically have had a higher return potential compared to other asset classes like bonds or cash. However, it’s important to note that equity mutual funds also come with a higher level of risk, as the value of the stocks in the fund can fluctuate due to changes in market conditions or the performance of individual companies. Equity mutual funds may be a good choice for investors who are willing to take on some risk in exchange for the potential for higher returns and who don’t have the time or expertise to manage their own stock portfolio.
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The fund manager is the individual responsible for managing the investments within a particular mutual fund. This person is typically appointed by the fund house (asset management company) and has extensive experience in the field. The fund manager is responsible for analyzing, researching, and managing the stocks within the fund, making buy or sell decisions based on the performance of those stocks. It’s important to note that the fund manager plays a critical role in the success of the mutual fund, as their investment decisions can significantly impact the returns of the fund.
Equity mutual funds may be a good choice for individuals who don’t have the time or expertise to thoroughly research individual stocks and make informed investment decisions. These funds offer the opportunity to diversify your portfolio and potentially earn higher returns through exposure to a range of stocks. It’s important to note that equity mutual fund investments typically require a longer time horizon of at least five years in order to allow for growth. Additionally, it’s crucial that investors are willing to accept the inherent risks of investing in the stock market, as there is always the potential for loss. If you’re considering investing in equity mutual funds, it’s important to carefully consider your investment goals, risk tolerance, and time horizon before making a decision.
- Diversification: Mutual funds allow you to invest in a diverse range of assets, such as stocks, bonds, and cash, which can help to spread risk and potentially reduce the impact of any individual investment’s performance on your overall portfolio.
- Professional management: Mutual funds are managed by professional fund managers who have expertise in selecting securities and constructing a well-diversified portfolio. This can be particularly useful for individual investors who may not have the time or knowledge to manage their own investments.
- Convenience: Investing in mutual funds is easy and convenient. You can typically open an account online and make investments through the fund’s website or app, or by contacting a representative.
- Low minimum investment: Many mutual funds have low minimum investment requirements, making it possible to start investing with a smaller amount of money.
- Potential for higher returns: While there are no guarantees when it comes to investing, mutual funds have the potential to deliver higher returns than some other types of investments over the long term.
Equity mutual funds offer investors the opportunity to diversify their portfolio by holding a basket of stocks rather than investing in individual stocks directly. As a result, the risk of investing in equity mutual funds is typically lower than investing in individual stocks. However, it’s important to note that lower risk also typically leads to lower returns. On average, equity mutual funds may offer returns of 13–20% per year, though these are average returns over a longer period of time. It’s important to be aware that annual returns can fluctuate significantly, and in normal market conditions, returns may drop by 10–15%. In the event of a market crash like those seen in 2008 and 2020, returns can drop by as much as 50%. It’s crucial for investors to understand the inherent risks of investing in the stock market and ensure that they are comfortable with the level of risk they are taking on, as it is their hard-earned money being invested.
It is a good idea to familiarize yourself with different types of mutual funds by referring to this link Different types of equity mutual funds before making a decision on which fund to invest in.
Now that we know different types of funds, the potential returns for mutual funds can vary depending on the type of fund and the level of risk associated with the investments it holds. Large-cap mutual funds generally have lower risk and are likely to provide returns in the range of 11–13% per year. Small-cap mutual funds, on the other hand, may offer higher potential returns but also carry higher risk. If you are comfortable taking on more risk in your investments, you may consider investing in small-cap mutual funds, which may offer returns of up to 16% per year. If you are looking to invest in a specific sector, you may consider a sectoral mutual fund, which focuses on companies within that sector.
Lump-sum investment is a one-time investment of a large amount of money, as opposed to investing smaller amounts of money periodically over time. While lump-sum investing can be a useful strategy in certain circumstances, it is generally not recommended for investing in the stock market. This is because the stock market can be volatile and unpredictable, and investing a large amount of money all at once increases the risk of losing a significant portion of your investment if the market takes a downturn.
On the other hand, systematic investment plans (SIPs) involve investing smaller amounts of money on a regular basis, such as weekly, monthly, or quarterly. SIPs can be a good option for those who want to invest in the stock market but want to reduce the risk of investing a large amount of money all at once. By investing small amounts of money on a regular basis, you can take advantage of the ups and downs of the market and potentially achieve better returns over time. SIPs can also be a good way to develop a consistent investing habit, as long as you have a stable source of income.
If you do have a sudden inflow of income or a bonus, it may be a good idea to divide the money into smaller chunks and invest it over time rather than investing it all at once. This can help to spread out the risk and potentially maximize your returns.
There are a few important things to consider before investing in an equity mutual fund, regardless of whether you choose to invest through a lump-sum or a systematic investment plan. These may include the fund’s fees, performance history, the experience and track record of the fund manager, and the fund’s investment strategy and risk profile. It’s also important to carefully consider your own investment goals and risk tolerance before making any investment decisions.
Regular mutual funds are investment products that are sold through mutual fund distributors, who are certified advisors who provide advice on which fund to buy based on your investment goals and help clarify any doubts you may have about mutual fund investments. When you purchase a regular mutual fund, you may be required to pay charges to both the mutual fund company (also known as the asset management company or AMC) and the distributor.
On the other hand, direct mutual funds are purchased directly from the AMC without the assistance of a distributor. When you buy a direct mutual fund, you are responsible for choosing which fund to invest in without the guidance of an advisor, and as a result, you only have to pay charges to the AMC. However, it’s important to note that both regular and direct mutual funds are managed by fund managers from the AMC.
One way to determine how much you are being charged for a mutual fund is to look at the expense ratio, which is a measure of the fund’s operating expenses as a percentage of its assets.
To invest in equity mutual funds, you can either open a demat account with your bank or use an online broker such as Zerodha or Groww. A demat account is an electronic account that holds your investments in a dematerialized (demat) form, rather than in physical certificates. This makes it easier to buy and sell securities and track your investments.
When you open a demat account, you will need to provide some personal and financial information and complete the account opening process, which may include completing an application form and submitting any required documents. Once your account is opened, you can browse the available mutual funds and select the ones that you want to invest in. You can typically do this online through the broker’s website or app, or by contacting a representative for assistance.
It’s important to note that equity mutual funds, like all investments, carry some level of risk. While these types of mutual funds can offer the potential for higher returns over the long term, there is a possibility of losing some or all of your investment, particularly if you hold the fund for a shorter period of time. However, the risk of loss can be almost avoided if you hold the fund for a longer period of time, such as more than five years. This is because the stock market tends to fluctuate over the short term, but has a generally upward trend over the long term. Therefore, investing in equity mutual funds for a longer period of time may reduce the risk of loss due to market fluctuations.
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