Revisiting Equity Mutual Funds basics & essential points

A Mutual Fund is a type of financial vehicle made up of a pool of money collected from large number of investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Each Mutual Fund scheme is managed by professional Fund Manager(s). Equity Mutual Funds are considered to be riskier than other categories of Mutual Funds. The reason is that the majority of the corpus is invested in equities that may rise or fall. Carrying higher risk, Equity Mutual Funds may be presumed to generate higher returns than other types of Mutual Funds in the long run.

Types of Equity Mutual Funds

There are different types of Equity Mutual Funds. They can be differentiated based on:

• Market Capitalization
• Geography
• Investing Style
• Management Style
• Tax Treatment

Benefits

The benefits of investing in Mutual Funds are:

• A Fund Manager follows set of rules either defined by the regulator (SEBI- Securities and Exchange Board of India) and by the Asset Management Company to mitigate various forms of risks as far as practicable.
• Equity Mutual Funds are well diversified across stocks and sectors.
• If one intends to build a diversified portfolio with all types of stocks by buying them directly, he/she would need comparatively large amount of money to begin with.
• As a company grows and earns profit, it usually chooses to partially reinvest 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.
• Buying Mutual Funds is more convenient than directly buying multiple stocks as one needs to invest in one/few Mutual Fund scheme(s) as per product suitability.  On the other hand one needs to trade multiple times to buy individual stocks and create a similar portfolio in Direct Equity.
• All Mutual Funds are closely regulated by SEBI (Securities and Exchange Board of India) which mandates certain level of transparency in the disclosures. All Mutual Funds disclose their month-end portfolios on their website besides daily NAVs (Net Asset Value) and periodic expense ratios as mandated by SEBI.

Applicability of Equity Mutual Funds

Portfolio of Equity Mutual Funds schemes are constructed in a generalized manner.

The primary category of investors in Equity Mutual Funds is those who are in a position to accept a considerable amount of risk for the potential for a reward in the long run. If you are willing to invest and create wealth through Equity Mutual Funds, you must know your objectives, you should have a long term vision, you must analyse your capability to take risk and your willingness to take risk.

Risk-averse investors and investors who are not looking for capital appreciation usually do not go for Equity Mutual Funds. They may opt for Hybrid Mutual Funds and Debt Mutual Funds as per requirements.

Considering subjective financial goals, time horizons of investments, risk profile, personal aspects as well as macroeconomic scenarios, one must not randomly invest his/her hard earned money in Mutual Funds without proper knowledge of the products. Product suitability framework must be obeyed to avoid needless financial distress.

Mutual Funds investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance does not necessarily indicate future performance of the schemes. Mutual Funds does not guarantee any return(s). Investors are requested to review the prospectus carefully and obtain professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme.

SEBI Circular

Circular, dated October 6, 2017, bearing no. SEBI/HO/IMD/DF3/CIR/P/2017/114, issued by Securities and Exchange Board of India, regarding “Categorization and Rationalization of Mutual Fund Schemes” should be exclusively considered for exact details.

Disclaimer

Mind Map prepared, information and opinions expressed are completely personal. I shall not be held liable for any improper or incorrect use of the information described and/or contained herein and I assume no responsibility for anyone’s use of the information/opinion.