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Types of Equity Mutual Funds: Part 1
Equities is a subject that’s of great interest amongst investors the world over! And it can’t really be explained in a few minutes… So let’s start slowly… Before we jump right into equity mutual funds, how about we spend a few minutes, understanding the words “Equity Stock” or “Equity Share” - collectively called ‘Equities.’
This word comes from the word “Equitable” or “Equally Divided”.
Okay, imagine this – you go to a fruit market in the peak of the summer and see this gigantic watermelon. Now, a lot of people want to buy it but can’t afford to do so because it’s really large and so very expensive. The owner of this large watermelon is aware of this, so he decides to cut the watermelon into smaller, equal sized pieces. In other words, equal sized shares…. Well, this makes a lot of sense to the prospective buyers and they all queue up to buy the pieces. And the more money they have, the more pieces of the watermelon they can buy!
Well, just like each piece of watermelon, an Equity stock is nothing but a “Share” of a company. The more shares investors own, the larger is their share of the profits or dividends declared by the company. But, obviously, investing in shares of companies is far more complicated than buying a share of the watermelon….
So basically Equity Funds are those that invest primarily in ‘equity shares or stocks, which are also collectively known as equities’. Got it!
Yup! And here’s a broad way of classifying equity funds based on the style of investing. Value Style, put simply, is bargain buying. First the equity analyst team or fund manager will assess the business of a company and assign a value to the price per share based on various factors. A value investor will only buy if the current market price of that share is lower than the assessed price.
Umm, let’s try this with an example. Say it’s still summertime, and a shop that sells woollen jackets, is relocating to another city. They announce a stock clearance sale, to get rid of their inventory. Now, a lot of people may not see the value of buying woollen jackets in the summer, but a few people decide to buy the entire stock out at a discount as they know that come winter these woollen jackets can be sold at a substantial mark up.
Pretty smart, huh? Well, similarly, there are times in the stock market when investors panic and sell out, making stocks available at low prices. Under-pricing of stocks also occurs when the value of the company is not known, and it’s mis-pricing like this that value investors lookout for. You see, the fund manager can identify the hidden value in a company that others may have missed, and begin buying this stock. When the others realize the value of the company, they start buying too and the stock prices appreciate, making a person’s investment appreciate with it! this will give an investor a great bargain, worth his while…
But what if you’d rather invest in a collectible, like a Micheal Angelo painting? Oh yeah it’s going to be expensively priced, but you might be interested in investing in this particular item because you know it’s value will only appreciate tomorrow and bare better returns for you.
Exactly! That’s the logic the ‘Growth Style’ of investing follows, investing in companies that are likely to continue growing their profits at a reasonable rate. In that case, the fund manager may buy stocks even if they seem fairly priced, because the future growth justifies the current high price.
It’s actually quite simple, right? So what you might want to do in order to make an optimum purchase is to invest in a suitable combination of cheap stocks at a great bargain and expensive stocks with an appreciating value. Now THAT’s a great assessment of how you can make your decisions….
These aren’t all! There are other ways, in which equity funds can be classified, each with unique characteristics, making it easy for investors to find one that suits their needs. Watch our next 2 videos for more kinds of equity funds, based on the themes of their portfolio constructions and on the size of the underlying companies in their portfolio.
We hope you enjoyed watching this video! Watch more, and we’ll help you learn about different investing concepts. You can also write to us with your feedback (editor@templeton.com)
