SPEQ Research •
08'th Aug 2024
Mutual Funds
What are Mutual Funds?
A mutual fund is a type of organization that collects money from several investors, and it reinvests this money in a different investment opportunity like it can be invested in equity, or debt, either in one or in both.
The positive side of Mutual funds is that they earn interest on dividends or income with no accentuation. Here�s a simple way to understand the concept of a Mutual Fund Unit �
Let�s say that there is a box of 12 chocolates costing ?40. Four friends decide to buy the same, but they have only ?10 each and the shopkeeper only sells by the box. So, the friends then decide to pool in ?10 each and buy the box of 12 chocolates. Now based on their contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds.
The cost of one unit = Simply divide the total amount with the total number of chocolates: 40/12 = 3.33.So, if you were to multiply the number of units (3) by the cost per unit (3.33), you get an initial investment of ?10. This results in each friend being a unit holder in the box of chocolates that is collectively owned by all of them, with each person being a part owner of the box.
The benefits and risks of mutual funds -
Mutual funds offer professional investment management and potential diversification. They also offer three ways to earn money:
- Dividend Payments: A fund may earn income from dividends on stock or interest on bonds. The fund then pays the shareholders nearly all the income, less expenses.
- Capital Gains Distributions: The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, the fund distributes these capital gains, minus any capital losses, to investors.
- Increased NAV: If the market value of a fund�s portfolio increases, the value of the fund and
its shares increases after deducting expenses. The higher NAV reflects the higher value of
your investment.
All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.
Types of mutual funds -
Equity Mutual Funds
Equity mutual funds invest at least 65% of their assets in equity and equity-related instruments. These funds aim for high returns by capitalizing on the growth potential of these companies.
Debt Mutual Funds
Debt mutual funds invest in fixed-income instruments like bonds, government securities, and money market instruments. These funds aim to provide stable returns and preserve capital. Interest rate changes impact their performance.
Hybrid Funds
Hybrid mutual funds combine investments in both equity and debt instruments. This mix helps balance risk and reward. They are designed to provide growth from equities and stability from debt.
Solution Oriented Funds
Solution-oriented mutual funds are designed to provide specific financial goals like retirement planning and children's education. These funds have a lock-in period of at least five years or until the goal is achieved.
Other Mutual Funds�
Index Funds
As the name suggests, index funds track a specific index like Nifty or Sensex. An index can include a mix of equity, equity-related instruments, and bonds. Index funds ensure they invest in all the securities tracked by the index, aiming to either match or outperform their benchmark.
Top 10 mutual funds in INDIA -
Bandhan Infrastructure Fund
Invesco India PSU Equity Fund
ICICI Prudential Infrastructure Fund
Nippon India Small Cap Fund
SBI PSU Fund
DSP T.I.G.E.R. Fund
Franklin Build India Fund
JM Aggressive Hybrid Fund
HDFC Balanced Advantage Fund
Bank of India Credit Risk Fun
Direct Equity �
Direct equity refers to owning shares of stock in a company, representing an ownership interest in that company. When you purchase direct equity, you become a shareholder and gain certain rights, such as voting on important company matters and receiving dividends, depending on the company's performance and policies.Investing in direct equity involves selecting specific companies to invest in, as opposed to indirect investments like mutual funds or exchange-traded funds (ETFs), which pool money from many investors to invest in a diversified portfolio of stocks and other securities. Direct equity investments can offer significant returns but also come with higher risks due to the volatility of individual stock prices.
�Direct Equity provides capital funding in exchange for an equity interest without the purchase of regular shares of a company's stock. Direct Equity may involve a company in one country opening its own business operations in another country.�
How Does Direct Equity Investment Work?
When an investor directly invests in equity, they now own a limited percentage of the company. In other words, the investor owns a piece of the cake. In direct equity investment, the deal is � the investors offer operational capital and, in return, receive a percentage of the profit or losses in the organization. Investors who invest in companies through direct equity can also earn dividends quarterly or annually.Direct domestic equity investment or any other kind of market-linked investment instrument is not ideal for risk-averse individuals. Individuals and institutions with time constraints, resource limitations, and inadequate investment knowledge must invest in domestic funds such as mutual funds � because domestic funds incur moderate to low risk while offering consistent returns.
What are the potential benefits of equity investments?
The main benefit of an equity investment is the possibility to increase the value of the principal amount invested. This comes in the form of capital gains and dividends.An equity fund offers investors a diversified investment option typically for a minimum initial investment amount.If an investor wanted to achieve the same level of diversification as an equity fund, it would require much more � and much more manual � capital investment.
Investors may also be able to increase investment through rights shares, should a company wish to raise additional capital in equity markets.
Top 10 Direct Equity in INDIA
Tata Motors
SBI Life Insuran
NTPC
Sun Pharma.Inds.
O N G C
ITC
Grasim Inds
Power Grid Corpn
JSW Steel
Larsen & Toubro
Which is better for you -
For Experienced and Active Investors: Direct equity might be more suitable for those who have the time, expertise, and interest in actively managing their investments and are comfortable with higher risk for potentially higher returns.
For Passive and Risk-Averse Investors: Mutual funds are generally better for those who prefer a hands-off approach, want professional management, and seek diversification with lower risk.
For Beginners: Mutual funds are typically a better starting point due to the lower risk and professional management, allowing new investors to learn about the market with less exposure to significant losses.
Ultimately, many investors choose a combination of both direct equity and mutual funds to balance the benefits and risks of each approach, achieving diversification while still having the potential for higher returns.