What is Equity Investment?

Equity Investment

These days, almost everyone is looking for the best investment tools suiting their financial needs. However, not everyone has good knowledge of investment avenues. Market-linked and fixed returns are the two latest options available in the Indian market to choose from.

The market-linked investment is further divided into two parts, namely, debt investment and equity investment. The equity investment plays a huge role in handling and managing public money properly. The money invested by the investor will be channelled in equities such as equity derivatives and shares.

The market has a major role in boosting the performance of equity investment. So, it would be safe to conclude that these investments bear high risk. However, the good thing is that now it is quite common for the investors to look at the fixed return investment option to avoid the risk.

Let’s have  a look into a few key facts about equity investment which lead you to make an investment in this domain and aims towards providing you with a lump-sum amount:

Classification of Equity Investment

As mentioned earlier, equity investment is not a single investment option. The investors have access to multiple investment avenues under equity investment and get to enjoy unique benefits from each of the investment options. You can check a few of the major equity investment options given below.

• Equity mutual funds: Those investors who have hardly any knowledge of stocks – equity mutual funds offer them a platform to learn. Mutual funds are a pool of money created through contributions made by investors. This pool of money is managed by the fund managers that build a portfolio which features many top-notch.

Investment in equity takes place through mutual funds which feature limited share of a company. Moreover, the investment in equity is market-linked so it is not entirely risk-free as the return rate cannot be predicted in advance. But the professional commitment, transparency, and the scheme ability to invest through SIP establish the mutual fund as a customer-friendly and attractive investment option.

• Shares: The term ‘shares’ is doing the rounds in the investment market since the 18^th The shares are traded in registered stock markets such as Bombay Stock Exchange, National Stock Exchange in case they are from the registered companies. Besides that, shares can also belong to the companies that are not listed. These shares can be exchanged through off-market transactions.

Also Read: Stock/share Market Investing Tips

The price of shares is impacted depending on the performance of a specific company with respect to its competitors. If an investor gets to buy the shares at a lower price and sell it at a higher price, then only s/he will be able to gain profits on her/his shares. This is why in equity investments, the profit, as well as risk component, is equally higher.

The shares of a company which has assets related to higher value are called large-cap companies. Smaller companies that have lower capitalization are called small-cap companies.

• Future and Options: The equity represents itself as part of the financial market. It also includes the broader financial market which includes derivatives of equities. As per experts, it is not these as an ideal investment as the contracts of the future are valid for only up to 3 months and that is not regarded as the suitable investment options for the long.

As it is an equity derivative, the performance of equity investment depends upon the underlying equity performance i.e. index or stock they come from. Additionally, the investors of F&O purchase the units of future contract by estimating and evaluating whether the price of index or share will increase or decrease in the near future. Hence, it is understood that F&O is a bet which the investor is considering to determine the movement of the underlying index or assets.

• Arbitrage Schemes: Arbitrage schemes are equity related hybrid funds that invest in equity derivatives, equity and numerous money or debt market instruments. In these funds, the scheme’s portfolio is formed by equities and equity derivatives. The variety of portfolio, arbitrage and the other equity-related schemes make it easier to control the downside compared to actual investments equity.

Arbitrage schemes invest simultaneously in equity and its derivatives. Thus, it ensures the investor that they can make a profit no matter the condition of the market.  However, it is important to show that this type of investment strategy holds thin margins from any individual transactions. As the individual has to bear different charges on security transactions, the expenses automatically increase and the investors receive the meagre return.

• Alternative Investment Fund: In India, the alternative investment fund is a newly introduced investment avenue. This investment avenue is meant for selected investor group. Examples of these investment options are angel investment scheme, infrastructure funds, hedge fund, real estate investment trusts. Moreover, this investment option is considered the riskiest avenue as of now in India. The investor will receive a lump sum amount as the return amount.

Key Risks Related to Investments In Equity

Investing in equity and equity derivatives involves lots of risks. Let’s check the risks associated with the investment in equity.

1. Market Risk: Sometimes, the whole stock market faces difficulties which affect the performance of all the stocks. This risk is named as market risk. For instance, at the time of demonetization in November 2017 all the stocks were impacted. Though, in such scenarios, the systematic risk allows the investors to pick up quality stocks at ideal valuations that can bring a high return in future.
2. Performance Risk: Individual stocks are managed under equity mutual funds and the stocks may not perform according to the expectations of the investor. Performance risk affects some specific sector as it focuses on particular sectors. The key strategy to avoid this risk is to diversify the investment in various sectors or industries to avoid the risk.
3. Political/legislative/social risk: Legislative or political changes also affect the performance of equity. If any party or the country promotes certain business in the international market, any change either in social or political activities, will affect the equity performances and the business of the company will start shrinking. To avoid such risk, the investors need to diversify their investments in different themes or industries.