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Article | Sip - Jan 01, 1970 | 05:30 AM

Mutual funds have grown to register a five –fold increase in less than a decade with assets under management totalling Rs 18.48 trillion on February 28, 2017, from 3.26 trillion as on 31st March 2007 as per AMFI data. The sheer number of schemes offered by the 40 plus mutual fund houses can leave a financial mogul bewildered let alone the common man. Yet, they have become a favoured source of investment for a range of investors, from beginners to HNI.

In fact, mutual funds offer a range of schemes to invest from debt funds, equity funds hybrid funds exchange traded schemes etc., Equity funds are schemes of mutual funds which are equity-oriented and invest in equity and equity-related securities of publicly traded companies. According to an industry trend report by AMFI, equity funds constituted 31.9%% of the mutual fund industry’s assets in December 2016. These funds are a popular choice among individual investors with a moderate risk appetite as mostly 85% of assets in an equity fund are derived from this segment.

Equity funds are classified on the basis of market capitalization and investment style. One of the main highlights of equity funds is that they allow ordinary investors to buy shares in companies through mutual funds rather than directly buying stock. Since a mutual fund is money pooled together from multiple investors, the cost of buying shares reduces.

Depending on the size and investment objective, equity funds can be of the following types:

Large Cap Funds: Mutual funds with a significant portion of their asset allocation in companies with large market capitalization (share value multiplied by the number of shares) are called Large Cap funds. While there is no set cut-off limit, as different agencies use different methods for classification, companies that are generally listed on the Sensex or S&P BSE-100 are usually large cap companies. These are well-established companies which offer stability and returns over a period of time.

Mid-Cap and Small-Cap Funds: Mutual funds which diversify investments in between mid and small cap companies are termed as mid and small cap funds. These funds invest in a mix of midcap and small cap stocks. Due to their exposure to high beta stocks, they are positioned on a high-risk return trade-off plane compared to a large cap fund. Funds investing in mid-size companies which are still developing are mid-cap funds and these funds. They are considered moderately riskier as well. Similarly, funds which invest in stocks of small-size companies are called small cap equity funds.

Multi-Cap Equity Funds: These funds invest across the “cap” sectors in a bid to diversify and seek to minimise risk. In other words, they are market capitalization agnostic. These funds resort to portfolio gyrations commensurate with the market condition. The understanding here is that an event might affect a particular industry and diversification across many sectors may aim to lower the impact of the event.

Sector or Thematic Funds: These funds invest in securities of specific sectors such as IT, Infrastructure and Pharmaceuticals. The performance of these funds depends on of the performance of these sectors.

Equity Linked Savings Scheme: ELSS are unique as they have a lock-in period usually of 3 years, and the returns are tax deductible (up to 1.5 lakhs) under Section 80C. They present a dual opportunity to invest in equity funds and save tax.

The price of any equity fund is based on its Net Asset Value (NAV). It can be defined as the total asset value divided by the number of units. When investing in a particular scheme, the investor is basically purchasing mutual fund units. The NAV of a mutual fund changes daily and hence does the value of the investment.

Also, there are various charges associated with mutual funds. This could in the form of an entry load, exit load, expense ratios, transaction charges, etc. While these charges seem inconsequential, it is important to remember that while your interest on your investment is compounded, so are many of the charges and can add up to a significant amount.

Equity investors are suggested to hold their investments for the long term (say 5 years and above) to achieve potential returns. Investing over a longer period could possibly help tide over short term losses as well. Another reason to invest for long-term is taxation. Investments in equity funds sold after 12 months qualify for long-term capital gains tax which is nil. On the other hand, investments sold within 12 months qualify for short term capital gains tax which are 15% on the returns.

While equity funds are considered riskier than debt or money market funds, they have the potential to generate potential returns and are suited especially for young investors relatively new to the market. They provide an opportunity to invest in companies at a lower rate. An individual investor by investing in a mutual fund diversifies his portfolio by investing in stocks of multiple companies. Not to mention, mutual funds are managed by a seasoned fund manager. The fund manager is mentioned in the scheme documents, and one can check their track record online. According to A Balasubramanian, “If you compare any industry in India with regards to transparency like banking, the mutual fund industry has one of the best transparency mechanisms of dealing with investor’s money from portfolio disclosure to how much the fund manager is earning.”

In the end, keeping in mind the volatility of the stock markets, where the prices zoom up or fall down, mutual funds seek to provide a stable platform for systematic investment.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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  • Indian Mutual Funds

    Indian Mutual Funds have currentlyinvested about 1.35 crore (13.5 million) SIP accounts through which investors regularly invest in Indian Mutual Fund schemes. (March 2017. Source: AMFI)

  • AAUM

    Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of March 2017 stood at ₹19.26 lakh crore. (Apr 2017. Source: AMFI)

  • Equity-oriented Schemes

    Equity-oriented schemes account for around 32.8% of the industry's assets. (March 2017. Source: AMFI) Equity-oriented schemes derive 85% of their assets from individual investors. (March 2017. Source: AMFI)

  • HNI Investors

    HNI investors account for 20.98% of investments for a period of 12-24 months. (Source: AMFI)

  • Benefit of Index Funds

    Index funds usually have much lower operating expenses over actively managed funds.

  • What is Net Assets?

    This figure represents the fund's total asset base, net of fees and expenses.