Equity Investment Strategies: Where To Invest For Maximum Returns

Equity investment is the process of investing money in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange. The main benefit of equity investment is the possibility of increasing the value of the principal amount invested, which comes in the form of capital gains and dividends. Equity funds are a type of investment fund that pools money from investors to trade in a portfolio of stocks, also known as equity securities. There are two primary categories of equity funds: actively managed funds and passive funds. Actively managed funds have portfolio managers who actively research, analyse and select stocks with the goal of outperforming a benchmark index, whereas passive funds include index funds, which aim to replicate the performance of a specific market index. When deciding where to invest in equity, it is important to consider factors such as investment goals, risk tolerance and time horizon.

Mutual funds

There are various types of equity funds, which differ based on their investment strategies, market capitalization, and tax treatment. Here is an overview of the different types:

Investment Strategy-based Categorization:

• Thematic or Sectoral Funds: These funds follow a specific investment theme or sector, such as BFSI, IT, or pharmaceuticals. They carry a higher risk due to their focus on a specific area.
• Focused Equity Fund: This type of fund invests in a maximum of 30 stocks of companies with market capitalization specified at the launch of the scheme.
• Contra Equity Fund: These funds follow a contrarian strategy, investing in underperforming stocks with the assumption that they will recover in the long term.

Market Capitalization-based Categorization:

• Large-Cap Funds: These funds invest a minimum of 80% of their assets in the top 100 large-cap companies, offering more stability than mid-cap or small-cap funds.
• Mid-Cap Funds: Mid-cap funds invest around 65% of their assets in mid-cap companies, providing better returns than large-cap funds but with higher volatility.
• Small-Cap Funds: This type of fund invests around 65% of its assets in small-cap companies, offering the potential for high returns but with greater risk.
• Multi-Cap Funds: Multi-cap funds invest in a combination of large-cap, mid-cap, and small-cap companies, with the fund manager rebalancing the portfolio to match market conditions and the scheme's investment objective.
• Large and Mid-Cap Funds: By investing in both large-cap and mid-cap companies, these funds offer a blend of lower volatility and better returns.

Tax Treatment-Based Categorization:

• Equity Linked Savings Scheme (ELSS): ELSS is the only type of equity fund that offers tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These funds have a minimum of 80% investment in equity and a lock-in period of 3 years.
• Non-Tax Saving Equity Funds: All other types of equity funds are non-tax saving, meaning the returns are subject to capital gains tax.

When investing in mutual funds, it is important to consider factors such as fund performance history, expense ratios, risk level, the fund manager's track record, investment strategy, and taxation rules.

Overall, mutual funds offer a managed approach to stock investment, providing benefits such as small investment entry, diversification, convenience, risk management, and strict regulatory oversight. They are suitable for investors who lack the time or expertise to invest directly in stocks, as well as those looking for accessibility with small investment amounts and long-term investors.

Exchange-traded funds (ETFs)

ETFs are an attractive option for investors because they offer low expense ratios and fewer brokerage commissions compared to buying stocks individually. They are also more tax-efficient than mutual funds, as most buying and selling occur through an exchange, and the ETF sponsor doesn't need to redeem shares each time an investor wishes to sell.

There are various types of ETFs available, including:

• Passive ETFs: These aim to replicate the performance of a broader index, such as the S&P 500.
• Actively managed ETFs: These do not target an index; instead, portfolio managers make decisions about which securities to buy and sell. While these have benefits over passive ETFs, they charge higher fees.
• Bond ETFs: These provide regular income to investors, depending on the performance of underlying bonds.
• Industry or sector ETFs: These track a single industry or sector, such as automotive or energy, and aim to provide diversified exposure.
• Commodity ETFs: These invest in commodities like crude oil or gold, and can be used to diversify a portfolio.
• Currency ETFs: These track the performance of currency pairs and can be used to speculate on exchange rates based on political and economic developments.
• Inverse ETFs: These allow investors to earn gains from stock declines without shorting stocks.
• Leveraged ETFs: These seek to return multiples of the underlying investment's performance, using debt and derivatives.

ETFs can be purchased through online brokers, traditional broker-dealers, or in retirement accounts. Some popular ETF providers include Vanguard, BlackRock iShares, and State Street Global Advisors.

Overall, ETFs are a cost-effective way to gain exposure to a diverse range of securities, making them a good option for investors looking to build a well-rounded portfolio.

Private equity

There are a few non-direct ways to invest in private equity, such as funds of funds, exchange-traded funds (ETFs) through brokerage platforms, and special purpose acquisition companies (SPACs). Funds of funds hold shares of many private partnerships that invest in private equities, allowing for greater diversification and potentially lower risk. ETFs can be purchased over a stock exchange without worrying about minimum investment requirements, but they add an extra layer of management expenses. SPACs are publicly traded shell companies that make private equity investments in undervalued private companies, but they can be risky due to a lack of diversification and potential pressure to meet investment deadlines.

Another recent development in private equity investing is crowdfunding, which allows individual investors to contribute smaller amounts of capital to new ventures. While this can be a highly risky endeavour, it provides an opportunity for those who cannot meet the high minimum investment requirements of traditional private equity investments.

Overall, private equity investing offers the potential for high returns but also carries significant risk. It is important for investors to carefully consider their financial goals, risk tolerance, and time horizon before investing in private equity.

Actively managed funds

• Are willing to take on more risk
• Prefer the potential for outperformance by active fund managers
• Have a longer time horizon

When choosing an actively managed fund, it is important to carefully research and analyse the fund's prospectus, investment objectives, strategies, risks, management team, historical performance and fees. Management fees and loads (commissions) can eat into returns over time.

• Systematic alpha: For clients seeking consistent alpha with lower levels of risk
• High conviction alpha: For clients seeking higher risk/return products
• Specialized outcomes: For clients seeking specific outcomes, such as equity income
• Precision alpha: For clients seeking specific country and sector exposures

Some examples of actively managed funds include:

• Advantage Small Cap Core Fund
• Advantage Large Cap Growth Fund
• Equity Dividend Fund
• Technology Opportunities Fund

Passive funds

The most common approach to passive investing is through index funds, which are a valuable addition to any investment portfolio. Index funds consistently mirror the performance of a market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). The portfolio of a passive fund precisely replicates a designated market index, with the composition and proportion of investments matching the tracked index.

There are several types of passive funds, including:

• Index funds: These are mutual funds or exchange-traded funds (ETFs) that track a specific market index. They are designed to replicate the performance of the index they track and offer investors broad exposure to a particular segment of the financial market.
• Exchange-Traded Funds (ETFs): ETFs are a type of passive fund that tracks the performance of an underlying index. ETFs trade on the stock exchange, and their prices fluctuate throughout the day.
• Fund of Funds (FOFs): FOFs are mutual funds that invest in other mutual funds, providing investors with a diversified portfolio of funds. FOFs can be actively or passively managed.
• Smart Beta: Smart beta funds are similar to ETFs but combine the benefits of passive funds with the selection of active investments based on certain criteria, allowing for higher returns using a cost-effective model.

When considering investing in passive funds, it is important to identify your financial goals, diversify your portfolio, and assess your risk tolerance. Passive investing requires patience, as short-term market fluctuations matter less over time. It is also important to regularly monitor and rebalance your portfolio to maintain diversification and risk exposure.

Frequently asked questions