‘Equity’ as an asset class seems to have caught everyone’s fancy, especially post the pandemic when the markets defied the signs of a slowing economy and continued to scale new highs. Albeit the fact that the economy was frayed, under the backdrop of digitization and margin improvement across most companies, we could see many companies do well. If you haven’t already heard about equity stocks and equity mutual funds, then you are probably living in a well. If these are the only two instruments you have heard about, then we are here to tell you more. Get a glimpse of many other equity-oriented investment options in India that you should gear up to explore.

Let’s start with what we are familiar with!

1. Equity mutual funds

These mutual fund schemes invest in equity-oriented securities, primarily equity stocks ranging across various market caps, including large, mid and small-cap and across sectors. The investment is based on the mandate as specified in the scheme investment document. There are funds which invest in specific sector or theme as well. Depending on the underlying investment, the risk profile of the fund varies. The funds which are categorised as equity have anywhere between 65% – 80% (minimum) exposure to equity investment options.

A fund with predominant exposure to large-cap equity stocks is considered to be of lower risk than other funds with exposure to midcap and small-cap stocks. The returns from these funds could be in the form of capital appreciation and dividends. These instruments are ideal for long-term wealth creation. It is suitable for investors with a relatively higher risk profile and has a long-term perspective.

2. Portfolio Management Services – H2 Tag

PMS is a service where the portfolio of stocks or stocks alongside other investment avenues, including debt, commodities, structured products, gold etc., are managed professionally by an expert, qualified individual. The professional who manages the portfolio is called the fund manager and ensures that the portfolio is designed and maintained in such a way to optimise returns and minimise risk. A fund manager is a licensed investment professional who is authorised to provide advice and has the required knowledge regarding the market dynamics and financial instruments to manage the portfolio efficiently.

The PMS is availed by High Net-worth individuals (HNI) clients, and unlike mutual funds, it is tailored to the investor’s specific requirements and risk profile. As part of the PMS process, an Investment Policy Statement (IPS) is drafted by the PMS to understand the existing financial position of the client and needs of the client. The investment is aligned with the financial goals and risk appetite of the client, it will undergo strategic realignment based on changes in clients’ requirements, risk appetite or tactical realignment based on market direction.

Types of PMS offered:

  • Passive PMS: This involves following benchmark index for selection of stocks and sectors. Relatively lower risk as no frequent realignment is carried out on the portfolio and aim is to generate returns which are similar to benchmark index. Also, it has low cost of implementation.
  • Active PMS: This portfolio is managed actively with frequent realignment to achieve alpha or beat the benchmark indices simply.
  • Discretionary PMS: These are highly customised portfolios where the fund manager holds complete control and adopts the strategy that aligns best with the IPS; the investor does not intervene in the manner in which the portfolio is managed.
  • Non-discretionary PMS: This is more along the lines of consulting or advisory services where the IPS are drawn, investment ideas are outlined, and the investor will have the final word on the execution of the recommendation and timing of execution.

3. Alternative Investment Fund

AIF is yet another equity investment avenue specifically aimed at HNIs; their work mechanism is similar to mutual funds, which pool funds from the public and invest them as per the mandate. The underlying investments in AIF are highly specialised and intricate, they typically hold a long-term view and scout for companies which are likely to deliver super average returns well into the future. These funds are dealt with in a strategic manner, and much of the tactical alignment is not undertaken due to their long-term perspective.

AIFs are privately pooled investment funds that enjoy the structural and operational flexibility not enjoyed by other investment vehicles such as mutual funds. AIF is established as an LLP (Limited Liability Partnership) or a company, trust, or body corporate. They are allowed to gather funds from investors who are either Indian or foreign nationals. The investment of funds is in accordance with the investment policy, which will benefit its investors. There are governed by the Securities Exchange Board of India (SEBI).

The returns are in the form of capital gains and are taxed in accordance with the norms applicable for other capital equity assets. These funds are aimed at sophisticated investors and foreign nationals. It is ideal for a person who has explored the other set of equity options and is looking for something that offers a different flavour to the portfolio. Like all other equity investment options, the risk profile is high, notably higher than the equity mutual funds.

4. Unlisted Equity or Private Equity

Unlisted or private equity is a spin-off from the alternative investment class and looks at investment in a company’s privately held equity. These companies have surpassed the startup stage, had high growth over the past few years and stabilised their financials. They are a step away from going public shortly. Typically, PE is sought by investors to earn higher returns as compared to that publicly listed equity shares. Correspondingly the risk is higher in the case of private equity.

PE firms are open to investors who are well acquainted with equity investments as a concept. Typically, they are targeted at HNIs. The PE managers often have the tough task of valuing companies whose financials are not publicly available. The risk is significantly high; however, it is relatively lower compared to companies’ funding at an early stage. Investors indulge in PE with a view to exiting during the IPO (Initial Public Offering), which could potentially offer huge returns.

Conclusion

If you have a good understanding of the market dynamics and the risk aspects concerning the above equity investment options, then it is time to branch out. Typically, equity should be looked at with a long-term perspective, it is also essential to understand in detail the risk factors and only then consider investing. Irrespective of where you invest, it is always essential to make an informed decision. You can reach out to financial counsellors at TATA Capital Wealth, who will help you help to expand your portfolio by including equity investment options in India that complement your risk appetite, financial goals and your existing portfolio. 

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