The rising inflations, and declining interest rates on traditional instruments like FDs, and RDs, pushing investors away from savings. It is the time for new-age investing. We have multiple investment options to safeguard our savings from rising inflation that can help meet future financial obligations. Choosing the right investment that proves sustainable over the long term and meets your financial objectives can be tricky. It can be in stocks, crypto, gold, sovereign gold bonds, unit-linked plans, etc. but one of the most popular investment vehicles that has been rising quickly is Equity mutual funds. The total AUM of mutual funds in India has grown to 66.7 lakh crores in 2024 from just 10.13 lakh crores in 2014. Let us understand why investing in equity mutual funds makes sense in 2024.
“Mutual funds are subject to market risk please read the documents carefully before investing.”
This is the line you will hear or see after every advertisement of mutual funds, but if it is risky, why do many advisors suggest investing in mutual funds? Let us understand the world of mutual funds, how it works, its background, growth in India’s future impact, & why investing in equity mutual funds makes sense in 2024.
a few important points that this article will be dealing with
- What is a mutual fund?
- Types of mutual funds
- What is equity Mutual funds
- Types of Equity Mutual funds
- Conclusion
- FAQs
Also read: – How to choose a perfect health insurance in 2024.
What is a mutual fund?
A mutual fund is a pool of investment gathered by multiple investors mutually with a common objective. This gathered fund is handled by a qualified fund manager who understands the market dynamics. A fund manager needs an in-depth knowledge of stock markets, financial instruments, macroeconomic factors, etc. A Mutual fund may have one or two fund managers.
These fund managers will do exhaustive studies on different markets, companies, macroeconomic factors, etc. These studies will help to churn out a list of investment options. The fund manager will invest in these identified avenues according to the fund’s objective.
Fund managers will keep studying the market and as per the changing trends in the market, geopolitical scenario, and other factors, they may increase or decrease investments in investment options, and they may add or remove some investment options from the list.
The investment growth in a mutual fund is in the form of interest, returns, and dividends. The growth of investment is passed on to investors after the deduction of charges by fund houses. These are shown as a percentage of the total assets under management (AUM). It is called the expense ratio.
Types of mutual funds
Mutual funds are divided into three major categories, these major categories are
- Equity funds
- Debt funds
- Balanced funds
Equity funds
Equity mutual funds invest in equity stocks trading on stock exchanges. The objective of an equity fund is to provide a handsome capital appreciation over the long term. Equity funds have higher upside potential but can also be risky during unstable market conditions.
Equity funds are suitable for those who wish to stay invested for the long term. Equity funds can have good returns that can easily beat inflation and earn additional capital appreciation. Equity funds are the most popular choice among the new age investors. This is one of the reasons why investing in mutual funds makes sense in 2024
A few types of equity funds
- Large-cap funds
- Mid-cap funds
- Small-cap funds
- Sectorial funds
- Flexicap funds
- Index funds
Debt mutual funds
debt funds are the safer forms of mutual funds. In debt funds, the investment options are much safer compared to equities. Here, the investments are done in fixed-income instruments like corporate bonds, G-secs, corporate bonds, treasury bills, commercial papers, etc.
Debt mutual funds are suitable for those who are looking to invest for the short term.
A few types of debt funds: –
- Liquid funds
- Short-duration funds
- Overnight funds
- Ultra-short-duration funds
Balance funds
A balance mutual fund is a combination of both, equity & debt investment options. Under this, as per the stock market dynamics, the fund manager has much larger options to choose from. A fund manager can consider equity stocks when they feel the market is doing well. They can protect the capital by investing in safer debt instruments when the market can turn out uncertain.
Types of Balanced Mutual Funds: –
Balanced mutual funds are roughly divided into two types, passive and aggressive mutual funds.
- Debt-oriented balanced funds: – these mutual funds focus more on capital protection than earning handsome returns for the investors. These are Passive & invested it’s at least 65% of the funds are in debt instruments and the rest in equity instruments. It helps to provide enough protection to the capital and provide an inflation-covering growth rate over some time. It is also known as debt hybrid funds
- Equity-oriented balanced funds: – These mutual funds are more inclined towards investing in equity instruments. It provides more growth opportunities than focusing on protecting investments. It is also known as equity hybrid funds. These funds invest at least 65% of the pooled funds into equities and the rest into debt instruments.
- Dynamic asset allocation funds: – these are the funds where multiple classes of investment options are identified and invested. The identified investment options can be equities, debts, real estate, gold, etc. It can provide a well-balanced approach to the folio as multiple asset classes are involved.
This balanced fund may provide rebalancing where a pre-decided percentage of the debt and equity is maintained after a certain period.
As this article is about equity funds we will focus more on equity mutual funds.
Also read: – The Six Essential Steps towards robust finance.
Types of equity funds
Equity funds are further divided into many types of funds. It can be Large-cap, Mid-cap, or Small-cap funds. The bifurcation of companies is as per the size. This bifurcation not only talks about the size but talks about the behavior, objectives, and risk. Equity funds could also be a mixture of companies with different market caps. It can be based on sectorial specifics like an equity fund only involving a specific sector. Let us understand all the types of equity mutual funds in brief. The variety of offerings under equity mutual funds can be one of the reasons why investing in equity mutual funds makes sense in 2024.
- Large-cap equity funds: – Large-cap companies have a market capitalization of 20,000 CR and above. In large-cap equity mutual funds, the pooled funds are invested in Large-cap companies only. Some of the large-cap funds are also called blue-chip funds as these funds only invest in companies that are market leaders of their respective sectors. Large-cap offers good returns with stability, this can be one of the reasons why investing in equity mutual funds makes sense in 2024.
- Pro: – Invest in companies with proven track records. It can easily beat the inflation. Large-cap companies are comparatively safer than other equity mutual funds. Easier to make decisions as large companies have a well-documented past.
- Cons: – it may give the least returns among all the equity class funds. It still bears a certain degree of risk. Patience is required when investing in large-cap compared to other equity classes.
- Mid-cap Equity funds: – Mid-cap companies have their market capitalization in between the range of 5000 CR to 20000 crores. Mid-cap equity mutual funds are those that invest in mid-cap companies. Mid-cap funds invest in companies that lie exactly between small-cap and large-cap. Midcap brings the best of both worlds, it can give better returns than large caps, and it is safer than small caps.
- Pro: – It has a higher growth potential compared to large-cap or blue-chip funds. It can easily beat the benchmarks if the market performs well. Mid-cap companies are relatively known with proven track records with well-managed resources.
- Cons: – Midcap funds can fluctuate rather quickly. The volatile nature of the midcap may not be suitable for all investors. When the market runs red, it may bleed heavily.
- Small-cap equity funds: The companies with a market cap below 5000 CR are called small-cap companies. Small-cap funds invest in small-cap companies only. These are the ones that can turn the tables rather quickly. The ones with the highest potential to grow but the ones with the highest potential to go down as well.
- Pro: – The share prices of small caps are lower than others. That helps in diversification. Small caps can give a huge upside-down if managed properly.
- Cons: –small-cap funds are the riskiest fund among all the Mutual funds. In volatile markets, it can make huge profits or break with huge losses for the investors.
- Multicap funds: – Multicap Funds are one of the types of equity mutual funds. These are the combination of Large-cap, mid-cap, and small-cap companies. Each Multicap find must possess at least 25% of each type of company. It brings the risk mitigation factors which can be one of the reasons why investing in equity mutual funds makes sense in 2024.
- Pro: – Multicap funds provide the much-necessary diversification. It is easier to balance the funds as the remaining 25% can be freely allocated to any of the three types mentioned above.
- Cons: – It must invest at least 25% in specific types of companies,
- Sectoral funds: – As the name suggests, Sectorial funds are sector-specified funds. When a specific sector seems to be doing exceedingly well compared to other sectors, and shows a good upside potential, asset management companies may launch a sector-specific fund. These are the equity mutual funds where a group of stocks dealing in the same sector is identified and invested. These funds will have only sector-specified stocks. These funds have been given to numerous multi-baggers in the past. This is one of the reasons why investing in mutual funds makes sense in 2024
- Pros: – These stocks can generate handsome returns if the sector is performing well in a conducive macroeconomic environment.
- Cons: – It can witness a steep downturn in case of entire category suffers. It is a sector-specific fund so any bad news related to the sector hampers the sectorial funds.
- Tax saver funds: – These funds are also known as ELSS mutual funds. These investments are identified under section 80C of the Income Tax Act. An investor can get a maximum 1.5 lakhs rebate under tax saver funds. These funds are one of the best tax-saving investments as it has only 3 3-year lock-in period. This is one of the reasons why investing in equity mutual funds makes sense in 2024.
- Pros: – These investments generate dual benefits for investors. Along with tax savings, it generates good returns. It has one of the least lock-in periods under 80C saving instruments. It can be kept investment even further than the lock-in period.
- Cons: – these investments are highly volatile and they might not be suitable for risk-averse investors. The Tax rebate is up to 1.5 lakhs only irrespective of higher investments.
- Index funds: – Index funds are one of the most popular types of mutual funds. In an index mutual fund, the pooled investment is invested in a specified index by a stock exchange. These have the lowest expense ratio. These are passively managed as they only follow indices. A good index fund shows the least tracking error. It gives handsome returns and tax savings hand in hand. This is one of the reasons why investing in Equity mutual funds makes sense in 2024.
- Pros: – these have the lowest expense ratio among all as it is passively managed. It can give handsome returns as the identified companies are from the stock exchange.
- Cons: – these are not actively managed so a fund manager can not optimize these funds based on several factors.
Conclusion
Last year, 41 equity mutual funds gave gains of more than 25%. These kinds of returns given by Equity Mutual funds have forced investors to pivot their investments from traditional options like FDs & RDs to Equity Mutual funds. It has the potential to give handsome returns over a period with a certain degree of risk involved. Asset under management for mutual funds is rising very quickly. The total AUM for the entire mutual fund industry grew by 40% last year to 63.7 Lakh crores. It is expected to reach 100 lakh crores in the next 2-3 years. These facts and figures show a radical change in the investment mindset of India. Mutual funds may get more prominent in upcoming years with equities leading the growth story for millions of Indian investors. This is one of the reasons why investing in Equity mutual funds makes sense in 2024.
FAQs
Q1. What are the loading charges in Equity mutual funds?
Ans: – Loading charges are a type of penalty that could be charged by the AMCs under certain conditions. There of two types of loading charges, entry loading charges and exit loading charges. For most of the equity mutual funds, there are no entry loading charges. There are exit loading charges on equity mutual funds. These are charged to the investors if they sell the mutual funds within 12 months of buying. Usually for equity mutual funds, these charges are 1% of the receivables.
Q2. What is the expense ratio in equity mutual funds?
Ans: – For running an AMC, there are certain costs involved. The salaries, rents, utility bills, incentives, commissions, etc. All these charges are recovered from the gains made by the investments. These charges are shown as the percentage of total AUM. It can be as low as 0.20% for index funds to as high as 2.5%-3%. Ideal charges for actively managed funds should not be more than 2%.
Q3. What are AUM and NAV?
Ans: – AUM stands for asset under management. It is the total pooled investment by all the investors in the specified options. The AUM of a fund is the total investment in that fund, similarly, the AUM of the AMC is the total investment put together by all the funds managed by the AMC.
NAV stands for net asset value. It is used to denote the cost of each unit of the mutual fund. Whenever a new fund is offered by an AMC, it is sold with an NAV of Rs. 10. Once these investments start pouring returns, the value of the NAV increases. Total number of units multiplied by NAV gives AUM.
Q4, Is there any lock-in period for equity mutual funds?
Ans: – There is no lock-in period for equity mutual funds except for tax-saving ELSS mutual funds. An ELSS fund comes with a lock-in period of 3 years only which is the least among all the tax-saving investment options. This is one of the reasons why investing in Equity mutual funds makes sense in 2024.