An equity investment is money that is invested in a company by purchasing shares of that company in the stock market. These shares are usually traded on a stock exchange.
Why One should buy equities?
Equity investors purchase shares of a company with the expectation that they’ll rise in value in the form of capital gains, and/or generate dividends. If an equity investment rises in value, the investor will receive the monetary difference if they sell their shares. Long-term demand for products and services, profitability of the company, quality of management and corporate governance standards of a company is very important for the company shares price to rise. Basically, any company must take care of three segments – consumers, employees and shareholders. If the company take care of the shareholders by giving regular dividends and improving the business of the company, the equity market will reward those companies. In simple words, equity investment can be described as business investment whereas other asset classes are not.
What are the risks involved in investing in equity?
The broad risks involved are price risk and the business risk. When one look at investing in a new company the business risk is high because of the uncertainty of the future. However, the price one pays to buy the shares will be relatively low. So, the price risk is less. However, when one by existing profit-making company, the business risk is much Lower.But one has to buy at a higher price. So, the price risk is higher. Understanding and assessing the price risk and business risk is important to understand equity investment and generate wealth from the investment.
What are equity funds?
Equity funds are managed by professional fund managers who identify more than one company and invest in those companies on behalf of the investors. The fund managers have the required skills and knowledge to understand the companies and make appropriate investment decisions. By building a portfolio of various established companies, the business risk is reduced substantially. However, the price risk may be higher based on the equity market level.
How to build Equity portfolio with minimum price risk?
Price risk is very difficult to assess. The best way to average out the price risk is to invest over a period. Investing through One full market cycle which include both Bull and bear Phase is the right time period to build Equity portfolio. Normally one market cycle covers around four years. So, it can be safely assumed that spreading the investment over a period of 4 years through systematic investment or systematic transfer may be a good strategy.
After having built the portfolio, staying invested for a long period of time is the best way to reap maximum benefit from the Investment. Staying insulated from market volatility and news flow becomes key to generate wealth.
How equity schemes are classified?
SEBI issued a circular on 6th October 2017 on Categorisation and Rationalisation of Mutual Fund Schemes.
The Schemes would be broadly classified in the following groups:
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Other Schemes
For equity schemes, SEBI has come out with 10 categories for equity schemes apart from Index funds, ETF, Arbitrage Funds. For classification purpose, SEBI defines Large Cap, Mid Cap and Small Cap as follows:
- Large Cap: 1st -100th company in terms of full market capitalization
- Mid Cap: 101st -250th company in terms of full market capitalization
- Small Cap: 251st company onwards in terms of full market capitalization
AMFI publish the list of stocks which Mutual Funds would be required to adopt. The 10 categories of schemes are:
Category of Scheme
Multi cap Fund
Investing across large cap, mid cap & small cap stocks without any limit
Large Cap Fund
Minimum 80% in large cap stocks
Large & Mid Cap Fund
Minimum 35% each in large and midcap stocks
Mid Cap Fund
Minimum 65% in mid cap companies
Small Cap Fund
Minimum 65% in small cap companies
Dividend Yield Fund
Minimum 65% in dividend yielding stocks
Value Fund & Contra Fund
Minimum 65% in value stocks or contra stocks
Investment in maximum of 30 stocks
Minimum 80% investment in a particular sector or theme
ELSS (Tax Saving)
Minimum 80% in equities