Referring to the shares in a company’s ownership, equity is the total amount of money that you will receive when the company pays off all its debt and liquidates its assets. When you, as an investor, invest in a company’s equity, you become its partial owner. Being an equity shareholder, you have the right to participate in the company’s profits, whose share(s) your own.
Note that when you invest in a company’s equity, you can earn profits when prices appreciate. For matters related to the board of directors, you enjoy voting rights.
How Can You Invest in Equities?
You can invest in this asset class via two ways: direct investment through stocks and investment via mutual funds.
Direct Investments Through Stocks
If you wish to invest in equities directly through stocks, you need to open a trading account and a demat account. While the demat account holds your shares in an electronic format, the trading account is the place to buy and sell orders with your stockbroker. Some of the advantages that you can get while investing in equities directly through stocks are:
- High Return Potential
This is perhaps the biggest benefit that you can derive through direct equity investment via stocks. If you can make the right pick, you can make substantial gains. Having said that, success entirely depends on your stock picking skills and the ability to sell it at the most opportune time.
- Huge Investment Universe
When you opt for direct equity investment, you get to choose from a large universe of stocks. You can pick the one which you feel has the potential to deliver maximum growth and augment your wealth in the long run. Depending on your risk tolerance, invest in a stock of a large cap, mid-cap, or small cap firm.
Things to Keep in Mind While Investing Directly Through Stocks
In direct equity investing, you need to be more careful about risk management. Hence, you must:
- Do thorough research on the different parameters before buying a stock.
- Keep yourself abreast with the latest market developments.
- Give yourself enough time to learn about stock market jargon and other fine details.
- Understand balance sheets of companies before investing and know their order books.
If you can spare time to do so and understand these things in-depth, you can go ahead and invest in equities directly through stocks. If not, the second option can be more prudent.
Investments Through Mutual Funds
Over the years, mutual funds have emerged as one of the most popular financial instruments to build a corpus for different life goals. Some of the significant advantages that you get while investing in equities through mutual funds are:
- Professional Management
While investing in direct stocks tests your skills. In the case of mutual funds, the fund manager picks up stocks and takes a call on your behalf. The manager does research and keeps track of market movements, and places a bet accordingly. In a nutshell, you can leverage the expertise of the fund manager.
- Diversification to Bring Down Risks
Mutual funds diversify your investments across industries and sectors. This brings down the quantum of risk associated with equity investments. Diversification ensures that the risk is well spread out. Note that events affect different industries differently. While it results in gloom for one, the same may result in euphoria for the other. Optimum diversification is important for long-term success.
- Low-ticket Size
The ticket size of mutual fund investment is relatively small. In other words, you can start investing from a pretty low amount, as little as INR 500. You can gradually top up your investment with an increase in income. This will aid you in building a large reservoir of funds.
- High Liquidity
Mutual funds are highly liquid. You can easily convert the same into cash when you require money. Upon placing a redemption request, the money is credited to your account the next day, subject to exit loads, if any.
Things to Keep in Mind While Investing Directly Through Mutual Funds
Just like direct equity investment through stocks, there are certain things that you must keep in mind while investing through mutual funds. Some essential lookouts are:
- Long-term Fund Performance
While investing in an equity mutual fund, it’s vital to consider the fund’s long-term performance. See how consistent it has been while delivering returns and how well it has performed during the bearish phase. It’s prudent to opt for a fund with consistent returns and has contained losses well when markets weren’t at their best.
- Fund Fundamentals
Prior to investing in a mutual fund, it’s crucial to look at the fund fundamentals. Identify its investment composition and the entities it invests in. Also, see how long the fund manager has been managing the fund. The performance of mutual funds depends to a great extent on the calls taken by the fund manager. It’s advisable to opt for a fundamentally strong fund whose manager has been there for a long time.
- Expense Ratio
Expense ratio, expressed in percentage, is the amount that fund houses charge from investors to address various fund management costs. The expense ratio is low for direct plans compared to regular ones. You must remember that a high ratio can eat into the profits.
Benefits Of Investing in Equities
Now that you know what equities are and the ways to invest in them, let’s understand the various benefits that equity investment brings to the table. Some potential benefits are:
- Inflation-beating Returns
With time, inflation brings down the value of money. For long-term goals such as children’s education and retirement, you need to invest in an asset class that has the potential to trounce inflation. Investing in equities can help you do so as they can generate inflation-beating returns in the long run.
- Capital Appreciation
Investing in equities can appreciate your principal capital by a significant margin. If you invest in an equity share of a fundamentally sound company, its price, in all likelihood, will appreciate with time. You can benefit from this capital appreciation.
Those who remained committed to their equity investments when markets crashed in March 2020 are now enjoying outstanding returns when markets have scaled the 50k peak. Also, if a company declares dividends, it can add to your regular income.
Risks of Investing in Equities
Equities are inherently volatile. Their prices depend on several internal and external factors, most of which are beyond the control of retail investors. Price swings can be extreme, and in such a situation, you need to stay patient. Also, while investing, you need to adopt a long-term approach. In the long term, the quantum of volatility comes down to a great extent.
You shouldn’t approach equity investment with a short-term view as it will likely result in losses more often than not. A long-term perspective coupled with discipline and patience can help you leverage the potential of equities to enhance your riches.
Bottom Line
If you have an aggressive outlook and a high-risk tolerance, equities are the go-to asset class. They can help you build adequate funds for different life goals, especially long-term ones, and ensure you address them with ease.
