A guide to understanding long term equity MF investments

  • Posted By : reliancesmartmoney.com
  • Thursday Apr 05, 2018

Equity Features (Key Takeaways)

  • High-Risk-High-Return Policy
  • Long-Term wealth accumulation scheme
  • Capital gains are tax-exempted
  • Diversification responsive

Equity has a risk-adjusted performance and is a way to reap inflation-adjusted returns. The key however is to be associated with a reputed Asset Management Company (AMC). The second most important fundamental of investments is to take ownership and frequently review your portfolio even if it is being managed by a skilled fund manager.

There are three basic risk-bearing levels, low, moderate and high. Investments can be held for:

  • Short term (1-3 years)
  • Midterm (4-7 years)
  • Long term period (above 7 years)

When investing in Equity (Stocks), you sign up for a longer tenure and you acknowledge that this is a high risk profile. Another chief tip while investing in Equity MF is to go down the SIP route. SIP or Systematic Investment Planning is a financial instrument which regularizes investments and brings in economic discipline.

Why Long-Term?

There is a central reason behind the long term investment psychology; market volatility. Equity has proven to give a return rate of 16% annually over the last fifteen years in India.[MS1]  Nevertheless when analysed on a short to mid-term basis, it is noted that owing to sharp market fluctuations, a steady return rate is not observed thereby not giving that kind of value for money which Equity is capable of.

What lies in the Equity Bracket?

Within the Equity bracket, one can invest in six major sub categories.

  • Large Cap

    Investments are made in some authenticated, high-performing large-cap stocks that are least risky and provide stable returns. These stocks move synchronously with the market offering risk-adjusted returns. Stocks in this category are generally associated with names like BSE Sensex, Nifty 50, and Nifty Next 50 among others. They can constitute around 70% of your portfolio.

  • Mid Cap

    Mid cap are companies with a midsized turnover and a comparatively higher growth potential. Logistics, media and consumer retails are some examples. Some of these stocks reap superior benefits from a positive market swing thereby offering meaty returns as compared to large caps. However, through a market crash, these stocks can be greatly impacted and may take a longer period to rebound. Investments in this category are riskier and can constitute around 20-30% of the portfolio.

  • Small Cap

    Small cap funds are the riskiest, yet, with an uppermost return potential. These companies have a small turnover but a fast growth rate. Nevertheless, since the risk associated with them is the highest, they should not constitute more than 10% of your portfolio and should be kept for a longer period to gain maximum benefits.

  • Multicap/Diversified/Flexicap

    Investments are not restricted to a particular segment (sector) or cap, instead are made across market capitalisation. They are synonymous to the word diverse and offer improved returns. Here, the fund manager has a free hand in exploiting the market to make the most of it.

  • Sectoral/Thematic

    Investments are made in a particular sector exclusively (example: Pharma, IT, Banking, Infrastructure among others). Fund performance is directly aligned with the sector performance. Returns are based on this and due to sector restrictions, are not as reaping as diversified funds. Fund manager needs to cleverly plan (well-timed) investments and exit before chances of a negative performance.


  • ELSS (Equity Linked Savings Scheme)

    These funds provide efficient tax-saving schemes (tax exemptions as per Section 80C) along with capital appreciation. They have a three year lock-in period (the time for which investments are blocked and cannot be redeemed) which enforces discipline and ensures that an investor gains potential returns.

Expert Tip

If you have extensive knowledge of the stock market and desire to invest directly in stocks, plan it like so:

  • Invest in large cap stocks independently
  • Rely on Mutual Funds for mid cap and small cap investments

Investor Challenges and Comparative Alternatives 

Despite excess MF options available, investors face certain unavoidable challenges that stop them from taking that first step towards this ideal saving set-up. As an investor, you may feel apprehensive due to the fact that despite all the information, you are unaware of how to choose a correct fund that caters to your preferences and stands with your expectations. Furthermore, potential complications in official procedures like paperwork, enrolment, etc. lead an investor to back-off.

  • Set a goal, delve into options at your level, start early, invest often and do not be plagued with invariable market movements if holding a long-term goal.
  • Introduction of online facilities (e-KYC) from reputed fund houses have solved complexity of paperwork.

In Conclusion

Under proper guidance and safeguard, investing in Equity MF can reap significant returns and with diversification an investor can achieve a well-managed portfolio.

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