When it comes to making investments, there are a lot of options for people to invest in. The primary aim of investing is to grow capital so that it reaches the investor’s goals. When it comes to investments that grow fast, equities top the list.
Investing in equities can get tedious for an investor since it requires a fair amount of study and research about the company and the sector that it operates in. To reduce the risk involved, one alternative is to invest in equities through mutual funds. Mutual funds are vehicles that pool resources from investors and invest the funds in a range of assets. These assets may be equity shares, fixed income instruments, corporate bonds, government securities, money market instruments etc.
The alternative for people looking to invest in equities is to pick an equity mutual fund. Depending on the type of equity shares that the mutual fund house invests in, they can be classified as:
• Large cap mutual funds
• Mid cap mutual funds
• Small Cap mutual funds
What is Small Cap mutual funds?
Small Cap Mutual funds are funds that invest primarily in Small Cap stocks. Small Cap stocks are those shares which are ranked beyond 250 in terms of market capitalization. These are generally small companies which are fast growing in their business. Their business may or may not be established just as yet, which means they are a risky proposition to invest in. This is because their value depends more on their performance and on external factors driving their business.
As such, even though Small Caps are risky, they are an excellent investment opportunity since they can grow in terms of value and market capitalization in the medium to long term. Whenever Small Cap stocks show growth, they tend to outperform large caps. However, when the markets fall, Small Caps are impacted first.
Small Cap stocks started becoming more popular off-late when inflated valuations compounded investors’ returns in just a few months. However, these stocks have taken a beating in the year 2018 and have broadly underperformed the market in the year 2019. But does that mean one should stay away from Small Cap stocks?
The best way to invest in Small Cap stocks is to pick out Small Cap mutual funds. Small Cap mutual funds reduce the risk since they invest in a range of Small Cap stocks. However, since Small Cap mutual funds are managed by a professional manager, these picks are based on research and company fundamentals as opposed to cherry picking.
When should you invest in Small Cap funds:
1. If you have a high risk appetite:
Small Cap mutual funds are highly risky. Their performance is very sensitive to market movements. These funds give tremendous growth when the market is in a bullish phase but during a bear phase, they show negative returns i.e. loss of invested capital. In case you can’t bear that high risk, invest in small amounts or invest in safer large cap funds that have lower returns but provide much better safety of invested capital.
2. If you have a long investment horizon:
Investing in Small Caps is not a strategy for the short term. Since Small Cap mutual funds are sensitive to market movements, any short term bear phase may pull their value down. This may not necessarily reflect their underlying value or the performance of the stocks that they hold, but it can lead to negative returns as most funds experienced in 2018. Small Cap mutual funds are long term investments. The top Small Cap mutual funds provide inflation beating returns over the longer term when short term fluctuations even out.
How to pick the best Small Cap mutual fund for investment:
Small Cap mutual funds 2019 have shown growth as compared to the fall in 2018. Funds that have invested in good quality stocks showing good business fundamentals are showing good returns. Top Small Cap mutual funds are showing returns and have turned attractive for investors once again.
1. Check their past performance:
While the past performance of a fund is no indicator of the future growth potential, it can speak volumes about the stocks that comprise the portfolio. If the mutual fund has not fared badly in a bearish market, it is testament to the quality of stocks in its portfolio. Compare the past performance against the growth of the broader Small Cap indices to make a decision.
2. Check their expense ratio:
The expense ratio is the ratio of total expenses incurred by the mutual fund against the total assets of the fund. A high expense ratio means a larger portion of the assets are being used to fund administrative and selling expenses. This does not translate into a higher return for the investors. The best Small Cap mutual funds do not have high expense ratio. The expense ratio limits as per SEBI depend on the assets under management (AUM):
• 2.25% - AUM of Rs. 500 to Rs. 750 crores
• 2% - AUM of Rs. 750 to Rs. 2,000 crores
• 1.75% - AUM of Rs. 2,000 to Rs. 5,000 crores
• 1.5% - AUM of Rs. 5,000 to Rs. 10,000 crores
• A 0.05% reduction for every Rs. 5,000 crore increase in AUM
• 1.05% - AUM above Rs. 50,000 crores
Checking the expense ratio against the ceiling is a good way of finding the right mutual funds.
3. Look into their sectoral allocation of funds:
Checking which sectors the mutual funds invest in can be helpful in deciding where to invest funds. If the mutual fund is investing funds in highly risky sectors that are going through turbulence, then that will not translate into good results for the fund and consequently, your investment.
4. Entry or exit loads:
Entry loads reduce the amount invested whereas exit loads reduce the net return on your investment. It is essential to pick a fund that has no exit load or one that has low exit load so as to get maximum returns on your investment.
Here is a list of top Small Cap mutual funds that research experts at IndiaNivesh Wealth Management recommend to have as a part of your portfolio.
Investing in Small Cap stocks can be a risky affair. A good broker house like IndiaNivesh can help you with good research reports that can help you invest in Small Cap mutual funds. So why wait, open a demat account with IndiaNivesh and enjoy the benefits that it has to offer.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Mid Cap Mutual Funds - Best Mid Cap Mutual Funds to invest in 2019
When it comes to return on investments, equities have proven one of the best avenues that beat inflation. The stock markets in India have provided double digit returns on investment in some years, compounding investors’ money. As far as equities are concerned, there are three types of stocks that an investor can pick: • Large cap stocks• Mid cap stocks• Small cap stocks Large cap stocks are the top 100 stocks based on market capitalization. Mid cap stocks are stocks ranked between 101 and 250 on the stock market based on their market capitalization. Small cap stocks are any stocks not ranked as above. Investing in large caps is generally considered to be a safe strategy since these are highly stable companies that provide good returns to their investors and conserve capital. On the other hand, small caps are volatile and explosive and can swing in any direction depending on market sentiments, global and national economic cues. The middle ground between these stocks are the mid caps. They are not as volatile as small cap stocks. However, they are not as stable as large caps. They provide stellar returns in case of a bull run, but perform worse than large caps in case of a downturn. But mid caps also provide an opportunity for higher capital appreciation over the long term. Choosing the right stocks can be problematic, since this process requires substantial research into the company’s fundamentals and knowledge about how the industry operates. If you’re looking at investing in mid caps for the near future, one option is to invest in mid cap mutual funds. What is mid-cap mutual fund? Mid cap mutual funds, as the name suggests, are those funds that invest a majority of their resources in mid cap stocks. To revisit mutual funds, a mutual fund is a vehicle that collects or pools resources from different investors and uses those to invest in different assets. These assets may be equities, fixed income debt products, gold etc. Mid cap mutual funds focus their attention on mid cap stocks. Mid cap mutual funds have seen tremendous gains in the last 3 to 5 years. If you go through a list of mid cap mutual funds and check the returns from 2014 to 2019, most funds will show an impressive figure since the mid cap index started booming from late 2016 and early 2017. Since mid cap stocks were largely undervalued before that, investors who put in funds before the boom are still making profits. However, in 2018, all gains on mid caps were erased when the stock market went through a bear phase. Since mid caps are volatile, many mid caps crashed and lost their valuation, pulling down the returns on mutual funds. In such a case, why should one invest in mid cap mutual funds? 1. Superior return:Over the long term, mid caps provide a superior return as compared to large caps. However, this investment is highly risky and generally beginner investors are advised to invest in such mutual funds after they gain a little bit of experience in investing and can stomach a few short term losses for long term gains. Mid cap mutual funds 2019 have slowly turned the corner and are starting to show small gains, which is encouraging. Mid cap funds that invest in quality undervalued shares can provide a good opportunity to grow capital. 2. Compounding:The principle of compounding is the most important thing to learn for an investor. Compounding is when income earned on an investment begins to generate income on its own. In case of mid cap mutual funds, if you opt for the growth option, the dividends are reinvested in the fund in the form of units purchased. This grows capital which earns dividend at a faster rate than the original investment. Using the power of compounding, capital can be grown faster. 3. Portfolio diversification:Investing a small portion of your total funds in mid cap mutual funds can diversify your risks and increase the total returns. This is for conservative investors who want to increase their returns. Who should invest in a mid-cap mutual fund? 1. Long term investors:Investors looking to build their capital over the long term should invest in a mid cap mutual fund. Investing for the short term can be disastrous since mid cap stocks are highly volatile and mirror the movements of the benchmark indices. These stocks can move in any direction which makes short term prediction of fund returns uncertain. If you are considering investment in any one of the top mid cap mutual funds, it is better to have a long term investment horizon of at least 3 to 5 years or longer. This will iron out all the fluctuations in value in the short term and will unlock value for your investments. Investing for the long term also provides the benefit of compounding since more dividends are reinvested as units. 2. Aggressive investors:Mid cap mutual funds are inherently risky since their core asset class of mid cap stocks is volatile. Since the market movements of these stocks can’t be guaranteed, returns on mid cap mutual funds can swing wildly from time to time. In fact, there may even be a loss of capital from a bear phase. That is the reason why these funds are recommended to investors who have a high tolerance for market fluctuations or aggressive investors. If you’re considering making a lump sum or an SIP investment in a mid cap mutual fund, you should make a list of the top performing schemes and analyse the following: • Past performance• Portfolio composition• Expense ratios The mid cap funds that perform the best in these three indicators can be taken up for investment. Here is a table of the best mid cap mutual funds according to the recommendation from the research team at IndiaNivesh Wealth Management: Now that you know all about mid cap stocks and top mid cap mutual funds, you may want to open a demat account with IndiaNivesh and start investing in them. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
4 mistakes to avoid while investing in derivatives
To err is human. To learn from these mistakes and invest better later is a sign of a good investor. Investing in futures and options is a great way to hedge your bets and make money in the stock market. However, not all investors do it correctly right from the beginning. That’s why, here is a list of mistakes you can avoid when you invest in derivative investments.1) Not having a proper exit strategyWhen the clock strikes 5:30, you know it is time to leave the office and head home (or wherever your evening plans take you). This is a proper exit strategy. Unfortunately, many investors don’t know when to get out of derivative investments. a) You need to know when to exit when you are not doing wellb) You need to know when to exit when you are doing well For example, you may have made a long call option hoping that the price of the stock would increase significantly over the strike price before the option expires. But if that’s not happening within the period, exit the option and seek better trades or long term derivatives. At the same time, know when to exit on short term derivatives when you are making a profit. Don’t wait on a profitable trade because you are hoping for the price to increase before the option expires. Stay too long and the tide can reverse at the blink of an eye. 2) Having unrealistic expectationsYes, there are a lot of traders in the market who do nothing but invest in futures and options all day. But that doesn’t mean you should quit your day job too. The derivatives segment does offer incredible opportunities for success in the financial market. But in order to avoid mistakes investing in derivatives and reach that stage, you need to gain lots of knowledge and experience. Don’t have unrealistic expectations just when you start investing. This can often lead to frustration and irrational decisions in the market. Have patience and focus on your investment goals one trade at a time. 3) Doubling up to compensate for lossesMany traders double up when the price of an asset has moved in the opposite direction. Doubling up is a strategy where the investor doubles his position in the option. This is to earn a larger return when the stock price moves to a more favourable position. Guess what, this strategy is highly risky and rarely works. At such times, it is best to close your trade and minimize your losses. 4) Lack of self-disciplineIn a stock market, the price of a security either moves up or down. But when it comes to derivatives, you can have multiple futures and options contracts on a single security. And that’s why the derivatives segment can be quite risky. One of the tips to investing in derivatives is to have self-discipline to ensure good decision making and long-term success in the derivatives segment. Don’t act on unsolicited tips or rumours in the market. Always make an investment decision after you have conducted your own research. ConclusionThe only people who don’t make mistakes in investing are time travellers. But since the technology has not been invented yet, you can be assured that everyone fumbles. But the important thing is to minimize your losses at such times. Have a proper strategy and trade accordingly. By avoiding the above mistakes, it is possible to perform better in the derivatives segment. The stock market can be an exceptional investment approach that can offer bounteous yields and help you accomplish your financial goals, through smart investments. However, if you are hesitant in diving into the stock market, as a beginner, you may want to conduct due research and avoid the mistakes mentioned above. Alternately, you could also seek the help and assistance of a certified financial professional, to best understand the approach you need to take while investing in the stock market. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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