Everything You Need to Know About Equities

The financial acumen of the modern Indian is higher than ever before. People are understanding the differences between saving and investing and flocking to invest in various products to generate long-term wealth. When you talk about building a fund or corpus for your latter years, the term equity is bound to come up multiple times. So, what are equities? In this article, we discuss the meaning of equity, its different types, and how you can benefit by investing in them.

What are Equities?

Simply put, equities are shares of a company. When you buy the shares (or equities) of a company, you get partial ownership of it as well, in direct proportion to the number of shares you hold. It can get you voting (ballot) rights and have a say in company matters too. Simply getting a percentage of ownership in the company is known as ‘common equity’. When you get additional rights, such as priority over common equity holders when it comes to dividends or asset liquidation, this is referred to as ‘preferred equity’. Now, if the company were to liquidate all its assets and eliminate all outstanding debts, the remaining amount that would be payable to you would be the actual equity that you own.

Equity Types and Forms

Now that you know the meaning of equity, let us turn our attention to its various types. Here are some of the most popular ones.

Stocks/Shares

The most direct type of equity is in the form of shares of a company. These can be bought in the primary market (for example, when an IPO is launched and the company offers you the chance to bid for its shares) or in the secondary market (shares bought from other shareholders looking to sell). Market volatility is an aspect that all investors need to be mindful of. While investing in shares can get you high returns, the element of risk is always there. Buy shares after carefully evaluating the company’s current performance, growth prospects, and your own risk tolerance.

Equity Mutual Funds

Mutual funds offer you an indirect way to invest in equities. When you invest in an equity fund you get corresponding units with a market-driven Net Asset Value (NAV). The fund goes on to invest in shares of a collection of various companies. Since the fund manager tracks the overall investments and manages the periodical reallocation of assets, many investors find this method less strenuous and more convenient. Moreover, the ability to invest small yet regular amounts via SIP helps cultivate a healthy investment habit without straining your monthly budget. It is no wonder that there are over 6 Cr active SIP mutual fund accounts in the country, as per the Association of Mutual Funds in India (AMFI).

With such immense popularity, it is hardly surprising that a vast array of mutual funds exist today. Equity funds, in particular, are the most popular of the lot and are available in the following categories.

• Large-cap funds –

  These funds invest in the shares of blue-chip companies, specifically the top 100 companies in India as per their market capitalisation. Due to the size and stability of the companies, large-cap equity funds are deemed to have a lower risk exposure than the other equity categories and offer a more predictable, stable income.

• Mid-cap funds –

  Mid-cap funds invest in companies that rank between 101-250 as per the market cap with a minimum exposure of 65% of the total underlying assets. While being riskier than large-cap funds, they can offer a higher potential for growth and returns.

• Small-cap funds –

  Investing in smaller companies can be quite risky. However, it can also present an opportunity to generate higher-than-average returns.

• Multi-cap funds –

  Multi-cap funds were created to offer investors the best of all worlds. They invest across all types of companies and reallocate assets based on prevalent market conditions.

Equity Futures & Options (F&O)

While equity in itself is an asset class that gives your ownership rights of the company, equity futures and options are derivative contracts. Their value is derived from the prevalent price of the stock. In essence, they are contracts with expiration dates. While in equity options, you have the option of exercising your call, you do not have any obligation to do so. So, if the price doesn’t move as per your expectations, you can let the contract expire without taking any action on it. In the case of equity futures, though, the obligation to complete the trade needs to be met before the expiry date of the contract.

Alternative Investment Funds (AIF)

Alternative Investment Funds, such as hedge funds, private equity funds, venture capital etc., were developed to cater to people with higher disposable incomes and those looking for new, innovative investment tools. These are usually preferred by high net-worth (HNI) people and firms who can take higher risks and put a large sum as upfront capital. The booming Indian startup environment has been providing an attractive investment playground for such equity investors.

Why Invest in Equities?

Investing in equities offers a variety of benefits, such as:

• Potentially high returns –

  Equity investment is one of the most preferred options to build capital in the long run to meet your various goals in life. Apart from a higher return rate, many companies also offer regular dividends to supplement your earnings.

• Offset inflation costs –

  With the cost of living increase each year, it is always difficult to anticipate the actual value of your current earnings, say in 10 years from now. The higher equity return can help you offset the negative impact of rising inflation while helping you live the lifestyle you desire.

• Flexibility and convenience –

  Thanks to web-enabled global investment platforms and easy access to the internet, stock trading has become quick and simple. You can open an online demat account in a matter of a few minutes and seamlessly start trading or investing for your future. Equity mutual funds give you the added convenience of investing through SIP.

• Liquidity –

  Direct equity investments, in the form of shares, can be bought and sold anytime in the stock market. This makes it a highly liquid form of investment that can be encashed anytime you need or want to.

• Tax benefits –

  By investing in Equity Linked Savings Scheme (ELSS) funds, you can get equity exposure while getting a deduction on your taxable income up to ₹ 1.5L per annum under the Section 80C of the Income Tax Act of India.

Do note, though, that equities are market-driven, and the performance of the stock or fund can swing anytime. It is important to do your due diligence before investing, build a goal-based investment strategy, and stay patient during turbulent times.

Checkout our SIP Calculator for expected returns before investing.