Equities It is a type of security that represents the ownership of a company. Equities are traded in stock markets. It can also be purchased through Initial Public Offerings (IPO), whenever a company issues shares to the public for the first time. In India, share trading actively happens in stock exchanges; prominent ones are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). It is one of the best options to invest in equities over an extended period as it will fetch good returns. It is also subject to market-related risk, and one needs to do thorough research before investing in equities. Equity shares constitute permanent capital for the firm and it cannot be redeemed during the lifetime of the company and as per the Companies Act of 1956, a company cannot purchase its own shares during its existence. At the time of liquidation, the equity shareholders can demand the refund of their capital amount and the same will be paid after meeting all the other prior claim including preference shareholders.

The price of a share depends on a number of factors:

  • Recent company performance – as evidenced in its published financial statements.
  • Current performance of the sector – in which the company operates, such as say the food sector. How are the peer companies performing?
  • Likely future company performance – as broadcast in company forecasts.
  • How the analysts rate the stock – is it rated a buy, a hold or a sell? When local analysts (usually stockbrokers) re-rate a share upwards or downwards this may impact the market price of the share.
  • The markets in general – if equity values are declining generally, there may be an exodus into other asset classes, driving share prices down.
  • Shocks to the system – shocks such as the terrorist attacks of Sept 11 and Lehman Brothers going bust, have a detrimental impact on stock markets.
  • Uncertainty – Markets dislike uncertainty above all else, as was seen during the euro sovereign debt crisis in 2011.

Types of Equity Investment

Direct Equity: The simplest form of investing in Equity market is buying the stocks directly listed on stock exchanges like NSE & BSE. One can do this either through a broker or an online platform. An investor just needs a broking account and a Demat account (where the shares are kept in the investors name).

As the complexity and need for return grows, the equity market can be invested via multiple approaches / vehicles. Some of them are listed below:

PMS – Portfolio Management Services

Portfolio Management Services account is an investment portfolio in Stocks managed by a professional money manager, that can potentially be tailored to meet specific investment objectives. When one invests in PMS, one owns individual securities unlike a mutual fund investor, who owns units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, your account may be unique. As per SEBI guidelines, only those entities who are registered with SEBI for providing PMS services can offer PMS to clients. There is no separate certification required for selling any PMS product. In India Portfolio Management Services are also provided by equity broking firms & wealth management services.

There are broadly two types of PMS:

  1. Discretionary PMS – Where the investment is at discretion of the fund manager & client has no intervention in the investment process.
  2. Non-Discretionary PMS – Under this service, the portfolio manager only suggests the investment ideas. The choice as well as the timings of the investment decisions rest solely with the investor. However, the execution of the trade is done by the portfolio manager.

Investor Profile:

  • RISK – High / Very High
  • RETURN – High
  • TENURE – Medium / High

Equity Mutual Funds

Equity funds aim to generate high returns by investing in the shares of companies of different market capitalization. They generate higher returns than debt funds or fixed deposits. How the company performance results in profit or loss decides how much an investor can make based on his shareholdings. An equity fund invests 60% or more of its assets in equity shares of companies in varying proportions. This should be in line with the investment mandate. It might be a purely large-cap, mid-cap or small-cap fund or a mixture of market capitalization. Moreover, the investing style may be value-oriented or growth-oriented.

After allocating a major portion of equity shares, the remaining amount will go to debt and money market instruments. This is to take care of sudden redemption requests as well as bring down the risk level to some extent. The fund manager makes buying or selling decisions to take advantage of the changing market movements and reap maximum returns.

Types of Equity Mutual Funds:

Based on Sector and Themes

Equity funds that focus their investments on a particular sector or theme fall under this category. Sector funds invest in one particular industry, like FMCG or Pharma or Technology. Thematic funds follow a particular theme, like emerging consumer companies or international stocks.

Since sector funds and thematic funds focuses on a particular sector or theme, they tend to be riskier. This is because their performance face sectoral as well as market risks. However, sector and thematic funds can be diversified in terms of market capitalisation.

Based on Market Capitalisation 

Large-cap equity funds: Typically, large-cap companies are well-established companies, making them large-cap funds stable and reliable investments.

Mid-cap equity funds: They invest in medium sized companies.

Mid-and-small-cap funds: There are even funds that invest in both mid-cap as well as small-cap funds.

Small-cap funds: Since smaller companies are prone to volatility, small-cap funds deliver fluctuating returns.

Multi-cap funds: Equity funds that invest across market capitalisation, which is in large-cap, mid-cap and small-cap stocks, are called multi-cap funds.

Based on Investment Style 

All the funds discussed above follow active investing style, wherein the fund manager decides the portfolio composition. However, there are funds whose portfolio composition imitate a specific index.

Equity funds that follow a particular index are called index funds. These are passively-managed funds that invest in the same companies, in the exact same proportions, making up the index the fund follows.

Example, a Sensex index fund will have investments in all 30 Sensex companies in the same proportion in which the companies form part of the index. Index funds are low-cost funds as they don’t require the active management of a fund manager.

The benefits of investing in mutual funds are many:

  • Expert money management
  • Low Cost
  • Convenience
  • Diversification
  • Systematic investments
  • Flexibility
  • Liquidity

Investments in Equity Mutual Fund can be done via 2 ways:

  • Direct – Lumpsum
  • SIP (systematic Investment Plans) / STP (Systematic Transfer Plan)

ETF – Exchange Traded Funds

Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. Until the development of ETFs, this was not possible before. Globally, ETFs have opened a whole new panorama of investment opportunities to Retail as well as Institutional Money Managers. They enable investors to gain broad exposure to entire stock markets in different Countries and specific sectors with relative ease, on a real-time basis and at a lower cost than many other forms of investing.

An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Think of it as a Mutual Fund that you can buy and sell in real-time at a price that change throughout the day.

Benefits Of ETF

  • ETFs offer several advantages to investors: –
  • Can easily be bought / sold like any other stock on the exchange through terminals across the country.
  • Can be bought / sold anytime during market hours at a price close to the actual NAV of the Scheme.
  • No separate form filling. Just a phone call to your broker or a click on the net.
  • Ability to put limit orders.
  • Minimum investment is one unit.
  • Enjoy flexibility of a stock and diversification of index fund.
  • Expense Ratio is lower.
  • Provides arbitrage between Futures and Cash Market.

Investor Profile:

  • RISK – High / Very High
  • RETURN – High
  • TENURE – Medium / High