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 When we talk to most Indians about mutual
funds, the general response is negative. When we probed deeper to
understand such an aversion to mutual funds, the common finding
was that many equated mutual funds with equity funds only. The
word ‘equity’ brings different emotions to different people. Some
people think of risk, some think of speculation, some think of
opportunity, but most Indians do not invest in equity. It is a
combination of these two that mutual funds still do not find
favour with most Indian investors.
In the previous article, we saw various different types of mutual
funds, which clearly highlighted the fact that there are many more
types of funds other than those investing in equity. We also saw
what mutual funds are, how they work and what they can do for the
investors. In this article, we will discuss what equity mutual
funds are and how they work.
There are various different types of equity funds. The innovations
in the market always come with an objective to produce better
results than what an average investor can achieve. Mutual fund
companies and professional investors have tried various investment
strategies to achieve such an objective. With this background, let
us understand the different types of equity funds. Equity funds
can be classified as under: |
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1. Management of Funds |
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 A. Actively managed funds
B. Passive funds or Index funds
The basic difference between these two types of funds is the
presence of a professional fund manager. As the name suggests,
actively managed funds are managed by fund managers whereas there
is no fund manager in case of passive funds. The fund manager in
an active fund attempts to outperform the broader market. Active
management of funds involves research and analysis of various
different companies, industries, economy and builds a portfolio
based on this research. On the other hand, passive funds do not
have a fund management or a research team. These funds mirror a
stock market index. The stocks in a passive fund are exactly the
same as those in the particular index and invested (at least
theoretically) in exactly the same proportion as they are in an
index. Since there is no research or manager intervention
involved, passive funds are cheaper. |
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2. Style of Investing |
A. Growth style
of investing
B. Value style of investing
The value style of investing can be described simply as bargain
buying. The fund manager attempts to buy companies worth Rs. 100
at less than Rs. 60 or Rs. 70. The equity analyst team assesses
the business of a company and assigns a price per share. If the
market price of the share is at a steep discount to this assessed
price, the fund manager buys the stock. Thus, if the fund manager
gets good value for the price paid, the stock is bought. On the
other hand, under growth style, the fund manager looks at buying
companies growing their profits at a very high rate. Even if the
company appears to be costly at present in the market, the fund
manager may consider buying the stock if the future growth
justifies the high price. |
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3. Asset Allocation |
A. Diversified equity funds
B. Sector or thematic funds
C. International equity funds
A typical mutual fund works on the principle of diversification to
the investor at an affordable cost. Given this, an equity fund
should ideally be a diversified equity fund. However, in order to
exploit opportunities offered by certain sectors from time to
time, managers launched funds that concentrated the investments in
certain industry sectors. Then came a little diversification
through broadening the definition of sectors and thus came the
thematic funds. These thematic funds invest in more than one
industry such that the industries may be somehow related, though
the same may not be necessary.
International or cross-border diversification allows an investor
to exploit opportunities outside one's own country. At the same
time, the benefit of diversification across different economies
and different currencies also reduces the portfolio risk. |
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4. Size of the Underlying Companies in
the Portfolio |
A. Large cap funds
B. Mid cap funds
C. Small cap funds
D. Multicap / flexicap funds
Most of the large investors have certain restrictions in terms of
the size of the companies they can invest in, largely because of
the poor liquidity in stocks of companies of smaller size. Large
companies also exhibit higher business stability. At the same
time, smaller companies have the potential to become bigger and
thus provide superior returns. There are also funds that invest in
companies across the market without any restrictions on the
size.As seen above, the equity funds also come in different
varieties. It is important for an investor to keep the
differentiation in mind while considering investment in equity
mutual funds. |
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To be continued |
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Amit Trivedi |
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The author runs Karmayog
Knowledge Academy. The views expressed are his personal opinions.
He can be reached at karmayog.
knowledge@gmail.com |
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