Investing is all about accumulating wealth over time. There are different types of investments. The return on investment varies across products. Investment returns can be market-linked or fixed.
Equity investment means money is invested in a company by purchasing the shares of that company. Equity investing is often considered as gambling because of the nature of operations. Return on investment is high, but involves a risk factor. Returns are dependent on market dynamics. It is an ideal investment to earn higher returns over a short period of time.
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Before investing in equity, it is beneficial to know about this investment:
This investment offers dual benefits: This is high returns and tax benefits. It has a diversified portfolio across sectors. Investors can opt to invest in small, mid-cap or large cap companies as per their preferences. It offers high returns over a long period of time.
This investment consists of shares of companies in a single sector like the finance sector, healthcare and so on. Investment risk is high, but returns are comparatively lower due to a lack of diversification.
In this fund, investments are made in small-cap, mid-cap, and large-cap companies; irrespective of size and sector. This ensures the portfolio is well diversified. This results in maximum returns on investment. Sectors and companies can be chosen by the investor himself.
Investments made in companies located globally are called global funds. Along with providing a diversified worldwide portfolio, return on investment is also high. Market risk is also high.
Hybrid funds invest in equity and debt securities. About 65% of funds are invested in equity and the remaining 35% in debts. Risk factor is less in hybrid funds as debt securities provide stable returns.
An important feature of market linked investments is risk. Risks of various types are linked with equity investments as well. These are:
When the financial market is not performing well, equity investments also crash. Market risk can be controlled to a limit by diversification. Sometimes, only a particular sector or industry is affected. But its impact is witnessed by other related sectors as well. During a market slowdown, investors can invest a lump sum in quality stocks at a reasonable price, which have the potential to produce high returns.
There is no guarantee on the performance of these investments. Example: Pharma stocks crashed when the pharmaceutical sector faced a crisis recently (FDAsends warning letters to Indian Pharma Firms).
In equity investments, investors are forced to sell shares at prices lower than their market prices, when there is a financial emergency. To avoid this, equity fund investors must invest a portion of their assets in different money market and debt instruments that offer high liquidity.
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Equity investments in global funds face a currency or exchange risk. When earnings are converted to Indian currency, exchange rate risk might result in profit or loss depending on prevailing rates.
Any social, political and legislative changes may impact the performance of equity funds. For example: a new rule in favor of the healthcare sector will result in better performance of healthcare companies. This will fetch the investors high returns. At the same time, a rule against the healthcare sector will have a negative impact on the performance of the fund.
Conclusion: Equity is an effective method of investing. If you are of the opinion that individual investing is risky, invest in equity mutual funds. They are less risky. It gives high returns over a short period of time. However, keep the risk factors involved in mind.
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