WHAT IS STOCK MUTUAL FUNDS?
Stock Mutual Fund can be defined as a class of Mutual fund that primarily invests in the stocks of companies that are publicly traded. For example, if you invest in the shares of GE, Microsoft, Dell, Dangote, and Proctor & Gamble, then you have a stock Mutual fund. Basically, stock funds allocate at least 80% of its assets to the stocks.
The stock market is highly regulated by the Indian Securities Exchange Board (SEBI).
BENEFITS OF INVESTING IN STOCK MUTUAL FUNDS
The following are some of the benefits of investing in Stock Mutual funds;
- Professional management: When it comes to investment management, the stock fund is one of the few Mutual funds that parade professional fund managers. These professional fund managers are always making research with a view to keeping track of the market. In addition, they know the appropriate time to buy or sell stocks in order to make mouth watery returns. They also analyze a company’s performance before investing your money in their stocks. To this end, you are guaranteed that your money is in safe hands.
- Diversification: Diversification is one of the greatest benefits offered by Mutual funds. You have the opportunity to invest in a wide range of assets, hence if one investment is not doing well, the other will balance it out. In order to reduce your risk, you can invest I other classes of mutual funds.
- Convenience: Investment in stocks has been made hassle-free. Most fund houses have moved the investment process online. You can monitor your investment from the comfort of your home or office. What’s more? Even the KYC process can now be done online, all you need is a stable internet connection.
- Disciplined investing: In order to cultivate a good investment habit, the stock fund has what is know as Systematic Investment Plan (SIP). SIP will enable you small amount either weekly, monthly, quarterly or yearly. The SIP will be programmed in such a way that the amount to be invested will be automatically debited from your bank account instead of manual investment each time.
- Systematic Investing and Withdrawals: The process of investing in stocks is pretty easy. You can withdraw your earnings directly into your bank account. Generally, there are no fees to either deposit or withdraw your earnings.
HOW DO STOCK MUTUAL FUNDS WORK
The stock Mutual fund investment process works in such a way that 80% of its funds are invested in shares of companies in different proportions with respect to its investment plan. The investment might be basically a large-cap fund or a mixture of market cap. Also, the investment style can either be growth oriented or value oriented.
Once a certain amount has been allocated to shares, the other percentage may be used to invest in the money market or debt. This is as a result of a redemption requests made by investors. The professional fund managers will keep buying and selling stocks in order to benefit from the dynamics of the market.
The frequent buying and selling of stocks would affect the expense ratio of the equity funds. Currently, the Securities Exchange Board of India has fixed the expense ratio upper limit at 2.5% and there are plans to bring this figure down. When the expense ratio is low, investors will benefit greatly.
TYPES OF STOCK MUTUAL FUNDS
The following are the various types of stock Mutual funds:
- Growth funds: Growth funds are a type of stock fund that primarily invests in stocks that has the potential for capital appreciation in a long term. Their focus is on firms that experience revenue growth rather than the firms that pay out a dividend. In terms of volatility, Growth funds are more vulnerable.
- Value funds: These are the type of stock funds that primarily invest in companies with good bargains. In other words, they concentrate on firms that have extremely low P/E ratios. In addition, Value funds are stocks of companies that use their profit to pay out a dividend to investors. Volatility is less in Value funds.
- Aggressive Growth Funds: This type of fund is almost the same as the Growth Funds only that Aggressive Growth Funds is more extreme. Their focus is on companies that are experiencing extreme Growth in terms of revenue. In addition, this type of fund takes more risk than the regular Growth Fund.
- Blend Funds: Blend Funds are for those investors that intend to achieve value objectives and growth. The intention of this fund is to make sure investors enjoy capital appreciation and current income on a long term basis within the same fund. In terms of risk and volatility, blend Funds are less risky compared to Growth Funds.
- Sector Funds: This is a type of stock fund that primarily invests in a single sector of the market like the medical sector or energy sector. In order for a fund to be considered as a sector fund, such fund must have invested over 25% of its assets in the sector. This type of stock fund is the most volatile.
- Large Cap, Mid Cap, Small Cap, and Micro Cap Funds: Under this category, the types of stock funds available are; Large-cap stock funds, mid-cap stock fund, and small-cap stock fund. The Large-cap stock funds primarily focus investment on large Capitalisation stocks. Large-cap firms are typically big time companies that drive the economy. Mid-cap stock funds are those funds that invest primarily in mid-size companies, while small-cap stock funds are funds that invest primarily in small businesses.
- Focused Funds: This type of stock fund are those that hold huge positions in fewer stocks. So many Mutual funds normally hold over 100 positions, but focused Funds hold between 20 to 30 positions per time.
HOW TO INVEST IN STOCK MUTUAL FUNDS
Investment in Stocks can be done in the following ways:
- Physical Office location: This is the physical location of the fund house closer to you. When going to the investment house, ensure you are handy with the following documents
- Proof of Address
- Proof of Identity
- Canceled Cheque Leaf
- Passport Size photograph
When you get there, you will fill out an application form and then submit all the above-listed documents.
- Through a stock broker: A broker is someone licensed to assist you with the investment process for a fee. The broker will guide you on which fund to buy or sell. The broker’s fee will be charged from your total investment amount.
- Online through the fund’s website: Investing in the stock market has been made easy with the introduction of the online facility. Most fund houses now accept online processing of investment. All that is required of you is to follow instructions, fill the forms correctly, and then submit the form for processing. The KYC process can also be done online after entering your PAN and Aadhar numbers. There would be verification after which you can then start investing. The online method of investing in stocks is preferred by most investors because it is simple, quick, hassle-free, and user-friendly.
- Through a Mobile App: It is now possible to invest in stock Mutual funds using a mobile app. Most fund houses have developed their various mobile apps that would enable individual investor to download and start investing. Investors can view their account statement, buy or sell units, and lots of other activities.
TOP STOCK MUTUAL FUNDS TO INVEST IN
The table below shows the top Stock Mutual fund in India.
|Stock Fund Name
|One year returns
|Three years returns
|State Bank of India
|Larsen and Toubro
|Kotak Mahindra Bank
|Tata Consultancy Services
|Housing Development Finance Corporation
REGULATING THE STOCK MARKET
The essence of regulating the stock market cannot be overemphasized. This is because Regulation would protect the interest of both the investors and fund managers. In India, all types of mutual funds are duly regulated by the Indian Securities Exchange Board. It is worthy to mention here that all stock funds must be licensed by SEBI.
SOME SEBI REGULATIONS FOR STOCK FUNDS
It is expected that Mutual funds must establish AMC with 50% independent custodians, independent directors, as we as a separate board of trustees to ensure a good relationship between fund managers, trustees, and custodian. Since the management of the funds is the sole prerogative of the AMCs, there exists a counterbalancing of risks.
The role of SEBI is to keep the sponsor’s track record, financial soundness, and the integrity of business transaction while granting permission. SEBI also vets the particulars of the funds. It is required that the funds must adhere to some advertisement codes.
With respect to the guidelines of SEBI, all the stock Mutual funds must be inspected on a yearly basis to ensure that they comply with laid down rules and regulations.
RISKS INVOLVED IN STOCK MUTUAL FUND
The following are some of the risks involved when you invest in Stock Mutual funds:
- Lack of ownership: When you invest in the stock Mutual fund, there is a high tendency that the ownership right will be given up since you didn’t buy individual stocks.
- Cost: When you invest in stock Funds, you will be paying a lot of charges for the management of the funds. However, if it is individual stocks that you owned, you will only pay fees when buying the stocks. You won’t pay any other charges till you want to sell the stocks.
Choice Overload: Investment in Stock Mutual fund is characterized by choice Overload. There are a lot of stock Funds to choose from. Sometimes, it can be confusing especially if you are not a financial expert. In order to insulate yourself from these inherent risks, you should consult a professional broker for proper guidance.