The Equity Fund

In this blog, we will be focusing on the different types of mutual funds. The plan is to talk about the main types of mutual funds and a few of their subtypes. For example, there are nearly 16 subcategories of debt funds while about 10 or 11 subcategories of equity funds.

The Mutual fund universe   

The primary categories of mutual fund are as follows:

1.         Equity  

2.         Debt  

3.         Hybrid  

4.         Other schemes 

Equity Category   

When it comes to retail participation, the equity category may be the most popular MF category. As the word "equity" suggests, the schemes in this category invest in shares of companies that are already on the stock market. As you know, there are a lot of different ways to invest your money on the market.

As you can see in the image above, the Equity category has nearly 11 different subcategories. Each of these groups is a different way to invest in the market, and they all have different levels of risk and rewards. But investing in an equity scheme is still done with the same goal in mind, which is to make money. The main difference between these groups is the length of time it takes to make money and the risks and rewards involved.

Many investors (at least those who buy equity funds) have unrealistic expectations when they buy mutual funds. They almost treat their money like something they can trade. Taking this kind of approach to investing in mutual funds can be risky for your money.

If you don't have the right goals and mindset for investing in stocks, it's almost impossible to get rich from mutual fund investing. So, what are the right goals and expectations when investing in a mutual fund that focuses on stocks?

Well, the true answer to this question depends on the exact subcategory of   the mutual fund you are looking at. However, here are a few generic pitfalls to avoid –  

Not a short term solution – Equity oriented mutual funds are not a solution for your short term financial goals. By short term, it means 2-3 years kind of time frame. Invest in equity-oriented funds only if you have the necessary time it deserves.

Why not short term? – One of the common follow up questions is why not consider equity MF for short term investments. there have been situations where short-term mutual fund returns have soared. But, it   requires a great amount of market study to figure this out.

Understand time – The phrase "time heals everything" may be familiar to you. This also holds true for market volatility. The market is unpredictable by nature. However, a common individual can only manage volatility by giving their investment enough time. Therefore, using a short-term strategy for MF investing is ineffective.

Don’t keep switching - - Switching is effectively redeeming units from 'Fund A' in order to invest in 'Fund B' for no particular reason. The fundamental meaning of long term investing is maintaining a position in a fund for numerous years. Occasionally, there will be justifiable reasons for you to migrate between funds; we will discuss these reasons in further detail in the future.

Headline investing – The majority of investors are influenced by newspaper headlines. A headline that even faintly suggests 'bearishness' is taken far too seriously and is used as a pretext to liquidate mutual fund investments.

The Equity mutual fund subcategories   

  • Large-cap fund – A large-cap equity fund invests primarily in large-cap stocks.  The idea is that these companies are also market leaders within their respective industries. These businesses should also be reliable and secure. Companies such as Grameenphone, Walton, BAT Bangladesh, Square Pharmaceuticals, and Robi are examples of large-cap stocks.

When an investor decides to invest in a large-cap fund, he often has two objectives: (1) capital appreciation in line with the market, and (2) Low volatility

In layman's terms, this suggests that the investor is interested in wealth generation with minimal capital risk. Remember that these are large-cap stocks, which are designed to be steady and therefore less volatile. Investing in the stock market, either directly or through a MF, inevitably exposes the capital to volatility. As stated previously, the only remedy for volatility is time. Consequently, it goes without saying that you must remain invested for an extended term to account for volatility and earn acceptable returns.

  • Mid-cap/small cap/large & midcap funds – The mid-cap fund mostly invests in mid-cap firms, while the small-cap funds invest in small-cap enterprises. Mid- and small-cap stocks are quite volatile. These funds, like large-cap companies, should be invested in for the long run. You cannot afford to invest in these funds on a short-term basis. For instance, consider how the s mall and mid-cap funds have performed over the last two years.

The objective of investing in either of these funds is the same as investing in large-cap stocks: long-term wealth creation. However, you anticipate a return far greater than a large-cap fund (against much higher volatility). This is evident given that the fund features companies with substantial growth potential. As the business expands, so would the returns.

  • Large and mid-cap funds – This is a mixture of mid-cap and large-cap equities. In contrast to an exclusive big/mid/small-cap fund, the 'large & mid' cap fund is anticipated to invest 35% in large-cap equities and another 35% in mid-cap firms. Since the big and mid-cap fund is a mixed bag, return expectations are slightly greater than with a traditional large-cap fund but lower than with a small-cap fund. The risk is greater than that of a large-cap fund but less than that of a mid- or small-cap fund.

Given that there are so many AMCs and, consequently, so many distinct funds for the same category, how does one select a single fund for investment? This is an entirely other issue, which entails analysing multiple risk, return, performance, and expense characteristics. We will return to this after we have completed all of our conversations on MF categories.