What are the pros and cons of equity funds?
The most important benefit of equity financing is that the money does not need to be repaid. However, the cost of equity is often higher than the cost of debt.
The most important benefit of equity financing is that the money does not need to be repaid. However, the cost of equity is often higher than the cost of debt.
Equity Financing also has some disadvantages as compared to other methods of raising capital, including: The company gives up a portion of ownership. Leaders may be forced to consult with investors when making a decision. Equity typically costs more than debt financing due to higher risk.
Mutual funds come with many advantages, such as advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
Higher yield. Although past earnings do not assure future income, variable income instruments usually have higher yields than fixed income instruments. No terms. Equity instruments are not subject to any term, so you can hold them for 10 minutes or 40 years, depending on your investment goals and objectives.
Equity funds are practical investments for most people. The attributes that make equity funds most suitable for small individual investors are the reduction of risk resulting from a fund's portfolio diversification and the relatively small amount of capital required to acquire shares of an equity fund.
Equity funds are suitable for investors with moderately high to high risk appetites. Debt funds are suitable for investors with low to moderate risk appetites. Within the broader equity, debt and hybrid fund categories, there are various sub-categories.
Professional management, diversification, small ticket size, regulations, high transparency levels are some advantages of investing in equity mutual funds. An Asset Management Company (AMC) works in a professional set-up with individual functions of research, analysis and trading being carried out by experts.
Small-cap and mid-cap equity funds are typically considered high-risk, high-return options as they invest in smaller companies with significant growth potential but heightened volatility.
Advantages of equity finance
Investors only realise their investment if the business is doing well, eg through stock market flotation or a sale to new investors. You will not have to keep up with costs of servicing bank loans or debt finance, allowing you to use the capital for business activities.
How much should you invest in equity mutual funds?
You must strive to save at least 30% of your gross income or ₹60,000 every month. To calculate how much amount you should invest in SIPs, we will have to use the standard formula, which is 100 minus your age to be invested in equity through mutual funds.
Equity shares are more static, while mutual funds are dynamic and include various types. Opportunities of portfolio diversification are higher with mutual funds, but equity shares can generate higher returns. Besides ELSS mutual funds, you have to pay taxes on both equity shares and mutual funds.
100% equity means that there will be no bonds or other asset classes. Furthermore, it implies that the portfolio would not make use of related products like equity derivatives, or employ riskier strategies such as short selling or buying on margin.
Equity financing may be less risky than debt financing because you don't have a loan to repay or collateral at stake. Debt also requires regular repayments, which can hurt your company's cash flow and its ability to grow.
Disadvantages. Illiquidity: PE investments are typically illiquid, meaning that they cannot be easily bought or sold. This can make it difficult to exit an investment if you need to do so. High Fees: PE investments typically have high fees, which can eat into the returns.
So anyone with a long term investment horizon may consider investing in equity funds. If you have long term goals like retirement planning or securing your child's future you may consider investing in equity funds. If you want to see your investments grow, you may have to give it some time.
Since these funds invest majorly in equity, they are known for their higher return potential. However, many people are unaware that they, in fact, perform better in the long-term.
The Bottom Line
Safe assets such as U.S. Treasury securities, high-yield savings accounts, money market funds, and certain types of bonds and annuities offer a lower risk investment option for those prioritizing capital preservation and steady, albeit generally lower, returns.
Risk of loss: Overall, private equity investments involve a high degree of risk and may result in partial or total loss of capital.
Equity funds are those mutual funds that primarily invest in stocks. You invest your money in the fund via SIP or lumpsum which then invests it in various equity stocks on your behalf. The consequent gains or losses accrued in the portfolio affect your fund's Net Asset Value (NAV).
What is equity fund in simple words?
An equity fund is a mutual fund scheme that invests predominantly in equity stocks. In the Indian context, as per current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65% of the scheme's assets in equities and equity related instruments.
Sectoral funds: These are the riskiest category of equity mutual funds which invest a minimum of 80% of their portfolio in companies belonging to the same sector. Low diversification adds to their overall risk with returns dependent on the performance of a single sector.
The 100% equity prescription is still problematic because although stocks may outperform bonds and cash in the long run, you could go nearly broke in the short run.
It depends. Debt financing can be riskier if you are not profitable as there will be loan pressure from your lenders. However, equity financing can be risky if your investors expect you to turn a healthy profit, which they often do.
The main advantage of equity-based compensation for employees is the potential financial reward. Since the value of your equity is linked to your company's stock price, your financial benefits could be more significant than fixed cash bonuses if your company succeeds and the stock price grows.
