Investing is the act of allocating a part of your income into investment schemes or a bank account (which is considered a part of conservative investing schemes). Those who choose investment schemes allocate a portion of their income to the market. It is done so to generate capital for the future. In most cases, the future refers to the time when someone opts to retire from the job market entirely. To accumulate enough wealth, people generally plan out their possible expenditures. This strategy is referred to as financial planning.
One of the ways people ensure the success of their financial plan is by opting for the investment tool which is referred to as mutual funds. It is an investment scheme in which money is pooled from a group of investors and once enough funds are collected, the AMC uses it to purchase different financial securities. However, the action of just selecting a mutual fund scheme is not enough. You need to select the right type of mutual fund scheme. One such variant is equity funds which are known for allocating their funds to equities and their related instruments.
What are equity funds?
Equity funds are known for investing mostly in the stocks of various companies. This is done to generate capital appreciation. However, you need to remember one important fact. In case you are considering an investment in equity funds, you need to steel yourself against investment risks. Apart from preparing yourself to take investment risks, you also need to remember that equity funds are not ‘one size fits all. There is a wide range of equity funds that can be classified by their investment objective.
The main aim of equity mutual funds is to generate returns for investors by allocating funds to stocks. These stocks are owned by publicly listed companies that belong to different market capitalizations. However, as stated earlier, equity funds usually come with high risks. The revenue you earn through investment in equity funds is dependent on the performance of the companies that the mutual fund portfolio invests in. The fund manager who manages the portfolio decides to allocate funds in equity funds by checking on things like the investment horizon, risk profile, and investment goals. Equity funds are known for being generally suitable to achieve long-term goals such as acquiring wealth for retirement.
How do they work?
This variant of mutual funds is known for usually investing a major part of its corpus in equity shares of companies in specific proportions. The asset allocation here is dependent on the category of an equity fund and how well it aligns with the investment objective. Based on the market conditions, the asset, then, can be allocated to stocks of small-cap, mid-cap, or large-cap businesses. After a significant proportion of funds is allocated to the equity segment, the amount that remains is invested in debt and other money market instruments. Doing so helps to bring down the element of risk. Simultaneously, allocating a portion of the fund to money market instruments and debt securities takes care of sudden redemption requests.
How to enjoy high returns by investing in equities?
- Do not follow the Herd Behaviour:
When you are new to the world of investing, you may find that there is a tendency amongst new investors to get swayed by the returns enjoyed by experienced investors and thereby trade in the same manner. To overcome this temptation to follow the herd, you first need to conduct a thorough research about investing in equity. If you are seeking more clarity on how to invest your funds in the financial markets, you can consult a financial advisor as soon as possible.
- Avoid speculations:
Another common trait amongst first-time investors is that they tend to give into speculations and tip-offs. While sometimes this may work, it can also expose your investments to a high degree of risk. Sometimes, these risks are something your portfolio is incapable of bearing. Sometimes, speculation-based tips are not based on research and facts. And thus, speculations are highly likely to be mere guesses. Instead of following speculations, you need to conduct your research and study the stock market to formulate your trading strategy.
- Diversify the investments:
Diversifying your mutual funds is easily among the most common investment tips which are offered to investors. Also, it is one of the difficult rules to follow. Because, if a particular asset class is performing well, you may find yourself relying primarily on that asset class. Even though how convenient it may seem to continue allocating funds allocated only to assets that performed well, you must diversify your investment portfolio. Doing so spreads your risk across different assets and therefore, also improves your returns in the long run.
- Don’t redeem your investments during a bear phase:
A bear phase can be referred to as the period when the market is going through a rough patch. During such times, it is understandable that you may consider redeeming your investments. However, instead of doing that if you were to power through and continue investing, you could end up with enough wealth whenever the bear phase ends as the market performance is cyclical. Having a bigger picture is very important as it will encourage you to keep investing whenever the market is not performing well.
By following these four rules, you have better chances of earning higher returns on your equity mutual funds scheme. While it may look tough to adhere to these rules when you begin investing, with time, it gets easier.