Mutual funds are pooled funds invested in multiple securities such as stocks and bonds. The volatility of these stocks and bonds has a cascading effect on both institutional and private investors, which directly affects the valuation of the mutual funds.
The principal aim of the mutual funds is to minimize the risk of investing in direct equities while retaining the high earning capacity thereof.
Mutual funds are considered as the stepping-stone to investing in equities directly. They are like testing grounds for your understanding of the stock market movements. When you invest in equity mutual funds, your first test is in choosing the right mutual fund.
The choice of the right mutual fund is directly related to its potential capacity to help you achieve your life events or financial goals while keeping in mind your risk capacity. It is understood that there is a lot of research and analysis involved in making this decision. The various types of mutual funds and their reasons for price fluctuations are explained in brief below.
Equity Mutual Funds
Equity mutual funds collect money from a large number of investors to buy shares of companies. On an average, an equity fund includes shares of 50 to 70 companies. While some funds may have as less as 30 companies, others may include up to 100 companies within its portfolio. The fund manager is assisted by an experienced research team to shortlist and select investee companies.
Here are six steps in the selection process :
- Shortlist companies among the thousands listed on the two primary stock exchanges. The professionals evaluate various parameters such as growth opportunities, quality management, robust business models, and sustainable advantage to shortlist the companies.
- Research the fundamentals through periodic interactions with management, customers, industry professionals, employees, and competitors. Further analysis through research reports and industry news is done for a detailed forecast.
- Adopt various valuation methods to determine the value of the shares of the shortlisted companies. The chosen method varies according to various industries, market conditions, and fund managers.
- Discuss and analyze whether to buy more shares, hold their position, or sell all shares or partially hold some shares.
- Build a portfolio based on the aforementioned analyses to ensure balanced holdings.
- The investment recommendations are presented to the investment committee for approval before investing.
You may be wondering how the above affects you when you invest in equity mutual funds. The answer is that it directly affects the value of your investment. Fund managers invest in companies expecting these to grow thereby increasing their value and share price, which increases your returns.
Net Asset Value (NAV) calculation
The value of an equity mutual fund is the total value of its entire shareholding. As share prices change every day, the value of the fund also changes and is known as the net asset value.
The trading hours on the stock exchange end at 3.30pm during the week. The asset management company (AMC) determines the value of its portfolios based on the closing share prices of the investee companies. Any operational charges and other expenses are deducted to calculate the NAV. The amount is then distributed among the outstanding units of the fund. Therefore, the market volatility and share price changes affect the value of your equity fund investments.
Most equity funds are open-ended schemes. When you make an investment in an equity fund the corpus increases. Similarly, when you sell your investments the fund corpus decreases. All surplus funds are invested by the fund managers based on their research and analysis. In case of any deficit, the fund managers exit certain investee companies to compensate the shortfall.
Calculating the NAV of an equity fund is a complex and cumbersome procedure. You may have no expertise and may find all this very confusing and daunting. Fortunately,there is proper guidance available for you at your fingertips.
The ARQ investment engine, a proprietary tool in Angel Wealth’s mobile application simplifies such research and analysis. It does a detailed analysis of over a billion data points to provide recommendations that are free of human bias.
Ideally, you need to plan well in advance by using technologically developed tools such as ARQ to access available mutual fund investment options and choose the right one that aptly fulfills your investment needs.
ARQ not only helps you to make quick and informed decisions but also enables you to efficiently plan your investments and determine returns on these.