Equity Mutual Funds: A Safe Start

Equity mutual funds have emerged as a powerful tool for wealth creation and financial security and offer a safe start to those entering the market. Their work is simple and effective. EMFs pool money from various investors and invest that corpus of money in a diversified portfolio. This diversification helps reduce overall risk by spreading it across multiple stocks, thereby reducing the impact of any individual stock price fluctuation. And what works best is that you don’t get overwhelmed in the process since these funds are managed by professionals. You can of course learn on your way but to begin your journey it is great to have someone show you how it’s done.

What are the advantages?

First of all, your money is invested in several different stocks, sectors and industries thereby reducing the risk associated with investing in individual stocks. Secondly, the fact that mutual fund investment pools are divided into ‘units’ of ownership, you can start investing with small amounts. To understand ‘units’ sample this- Equity mutual funds are built in a way that the investor buys ‘units’ of a Mutual Fund, where that ‘unit’ represents a small share of the mutual fund’s corpus that has been invested across multiple stocks.

The advantage of this approach is that mutual fund units could cost as less as INR 10-15, but what they represent is ownership of the pool that is invested across tens, if not hundreds, of underlying stocks. If you wanted to pick the same stocks individually, your financial outlay would be a lot higher since many of the underlying stocks could cost thousands of rupees each. However, due to the concept of having a common pool of money invested across a bunch of stocks, and the representation of that corpus in terms of ‘units’ held by an individual investor, investing in mutual funds doesn’t require large amounts of money at all - in fact, most SIPs could start at as low as INR 500-1000 per month. 

Equity mutual funds can be bought directly, or through Mutual Fund distributors (MFDs) or through specific equity brokers that might offer access to MF purchases. Both these routes can be accessed by approaching an MFD or various online booking platforms as well as from most banks - so there is ease of access and functioning. The biggest relief here is that your funds are managed by professionals. Trained fund managers make investment decisions on your behalf to maximise returns and manage risk and you can sit back and relax. 

Equity mutual funds are aligned with your long-term growth plans. So, they are ideal for long-term financial goals, such as retirement planning, emergency funds or saving for your child's education or buying a home and mostly give good returns. And of course, you can easily buy or sell mutual fund units, ensuring your money remains accessible.

Types of Equity Mutual Funds

• Large Cap Funds: These invest in well-established, large-cap companies, offering stability and moderate returns.

• Mid-Cap Funds: These focus on mid-sized companies, with the potential for higher returns, but accompanied by higher risk.

• Small Cap Funds: Investing in smaller companies, these funds offer the potential for substantial growth, but they also come with increased risk.

• Sectoral Funds: These funds invest in specific sectors like IT, healthcare, or banking.

• Balanced-Cap Funds Balanced mutual funds are mutual funds that contain a bond (debt) component and a stock (equity) component in a predetermined specific ratio within the same portfolio. 

• Focused mutual funds are mutual funds that hold only a small variety of stocks or bonds which have some common similarity amongst them.

• Flexi Cap Funds offer investors the flexibility to invest in companies of varying sizes and sectors, providing a well-rounded exposure to large-cap, mid-cap, and small-cap businesses. 

Mutual Fund Concepts One Should Know About

Here are some concepts that can help the reader understand mutual funds better -

• NAV (Net Asset Value): NAV represents the per-unit market value of a mutual fund. It is calculated by subtracting the fund's liabilities from its assets. As an investor, you buy or sell units at the NAV price.
  
  

• Total Expense Ratio: This represents the annual cost of managing the fund as a percentage of the fund's total assets. It is a measure of the total costs associated with managing and operating.  And lower expense ratios are generally more favourable, as they can lead to higher returns for investors.
  
  

• Systematic Investment Plan (SIP): SIPs are a well-documented and reliable way to invest in equity mutual funds, and have gained popularity in recent years due to the ease of digital transactions. It involves setting up an automated investment at a regular interval (monthly or quarterly) rather than a lump sum, allowing you to benefit from rupee cost averaging. In the long run, SIPs work out really well because they average out the cost of acquisition for you, since you will buy less units when the markets are high (NAV is high), but more units when the market is low (NAV is low).

 Before you start

• Define Your Goals: What are you investing for? Have clear objectives- Whether it's building an emergency or retirement fund, saving for a house or planning for life & leisure events. Having clear objectives will guide your investment strategy.

• Risk Assessment:  Invest money that is kept aside to experiment with initially and in tandem with your risk tolerance. 

• Selecting the Right Fund: Consult with a financial advisor or use online platforms to explore and select the best funds for your goals. Risk, diversification and fund performance should be your key considerations, apart from low expense ratios and any exit loads (which is a penalty for withdrawal of investment before a certain duration has elapsed).

• KYC (Know Your Customer): Complete your KYC formalities. This involves submitting identity and address proof, a photograph, and a filled KYC form.

• Invest Through SIP: If you're new to investing, consider starting with a SIP. It's an easy way, to begin with a small investment and gradually increase your exposure to the market.

• Monitor and Review: Regularly track your investments to ensure they align with your goals. While short-term market fluctuations are common, remember that equity funds are designed for the long haul.

The article is published in collaboration with the BSE Investors’ Protection Fund to spread awareness with respect to personal finance and investing, especially for women.

Suggested reading: Diving Into Equity Investing: A Beginner's Roadmap