Riding the Wave: Exploring the Surge in Equity Mutual Funds

 

Introduction:
The profits collected in the previous few years have made equity mutual funds more appealing. Mutual fund investors are flooding the market. When examining the rise in mutual fund folios during the previous year, the magnitude of the growth in new investments becomes apparent. In the fiscal year 2017–18, mutual funds added 1.6 crore investor accounts, bringing the total to over 7 crores.

This is a significant increase from the folio additions of 59 lakhs in FY2015-16 and over 67 lakhs in FY2016-17. During FY2017–18, retail investor accounts increased by nearly 1.5 crore, reaching 5.94 crore. New and inexperienced investors are adding to the pool of retail investors who already invest in mutual funds. Are the influxes of new investors familiar with market volatility?

Or will we observe money leaving the market as soon as it has a correction? In the face of volatility, ordinary investors may withdraw money if left to their behavioural biases. Avoid being seduced by the performance of stock mutual funds during the past few years if you are a novice investor. Instead, after creating a strong financial strategy, invest in accordance with your financial goals.

What Are Equity Funds?
An equity fund is a type of mutual fund that primarily invests in equities. In the Indian context, an equity mutual fund scheme must invest at least 65% of its assets in equities and equity-related securities, according to the current SEBI Mutual Fund Regulations. An equity fund might be managed actively or passively. Index funds and ETFs are managed passively.

Equity mutual funds are classified primarily by firm size, investment style of portfolio holdings, and geography. The market capitalisation of an equity fund determines its size, while the investment style, as represented in the fund's stock holdings, is also used to categorise equity mutual funds.

Equity funds are further classified as domestic (investing only in stocks of Indian companies) or international (investing in stocks of companies from other countries). These funds might be wide-market, regional, or country-specific. Sectoral funds are speciality equity funds that target business areas such as health care, commodities, and real estate.

Navigating Equity Investments in a Volatile Market
In a volatile market, equity investment allows individuals to benefit handsomely. Though gains are earned more quickly, the danger factor is also extremely large. When an investor decides to make an equity investment, they must consult with a broker or a financial advisor to ensure smooth trading. 

Trading is the process of purchasing and selling stocks on the stock exchange. Investors can buy and sell equity securities on the stock exchange. 

The existence of these markets ensures that investors' investments in equities will pay off when needed. Some of the most common types of equity investments are equity mutual funds, preferred shares, private equity investments, retained earnings, and common shares.

Benefits of Equity Mutual Funds

    • Professional leadership: In addition to excellent investment judgement, active portfolio management takes a lot of time and effort. As an investor, you can avoid keeping up with the prospects and potential of the companies in the mutual fund portfolio by investing in an equity mutual fund. A broad range of businesses are regularly researched and monitored by qualified research workers hired by the mutual fund firm.

    • Diversification: Lack of diversification is a crucial disadvantage of investing directly in equities. If your monthly investment objective is Rs. 5,000, only a limited number of assets can be added to your account. Thus, you run a high chance of harming yourself. When you have a concentrated portfolio, a fall in one investment might hurt all your other assets, lowering your portfolio returns.

    • Scale economies: Stock investors miss out on economies of scale by purchasing only a few stocks. This has a direct impact on portfolio profitability. If investors purchase and sell actively, the influence on profitability is magnified. In the case of mutual funds, frequent volume purchases and sales result in proportionately lower trading expenses than for individuals.

    • Liquidity: A stock investor might not always obtain the liquidity they desire in a stock. On some days, the stock may be hitting an upper or lower circuit, which would prevent purchases or sales. Additionally, if an investor invests in a penny stock, he can find it challenging to exit the position. Mutual funds provide the essential liquidity for investment.

Final Words:
The recent spike in equity mutual fund investments demonstrates growing market interest. The surge of new and inexperienced investors raises concerns about their ability to weather market turbulence. Rather than pursuing past results, newcomers must prioritise a strong financial strategy that matches their ambitions. Equity mutual funds have advantages such as professional management, diversification, economies of scale, and liquidity, making them a feasible option for people wanting equity exposure. Their investment journey should be guided by caution and a long-term view.