Equity is one of the largest asset classes globally. Usually when people think of equities, they think of equity shares of companies. However, the definition of equity can be used in Real Estate as well. In the case of company shares, equities are divided into 2 broad classes: Public Equity and Private Equity. Further, investors can either manage funds on their own or let an advisor manage them in return for a fee. From the investor’s perspective, the objective should be to maximize net returns. Net Returns are defined as the returns after all costs, that is, after advisory fees, brokerage and taxes.
Before we deep dive into equity lets first understand what it is. At a fundamental level, equity means a share in the profit of a company. So, someone who owns, say 10% equity in a company, owns 10% of net profits of that company. If someone owns 1 share of a company and then company has a total of 100 shares, then the person owns 1% (1 out of 100) in the company’s equity. As company’s grow larger they raise capital to continue expansion. Some of this capital is raised by giving a capital provider some ownership – by giving them some equity shares – in that company.
Public Equities as an asset class refers to equity shares of a company that are publicly listed and traded. Retail investors are mostly able to invest in these type of equity shares. There are many investment strategies within Public Equities. Each of these investment strategies have their own risk-return profile. Investors will have to choose which investment strategy matches their personal finance goals. The following are the ways in which equity investors can take exposure to listed shares.
Individuals have a choice between managing their equity investments themselves or using an advisor. It is generally recommended that investors manage their equity investors themselves only if they have the time and expertise. However, if the investor does not have the time or the skill for the same, it is best to let an advisor manage those investments. While the advisor will charge a fee, the net return after fees may still exceed what the investor can generate on his or her own, given the specialized nature of equity investment management.
1) Direct investments
Investors can directly analyze financial information and choose which stocks to buy. To do this an investor needs a trading account. More importantly, an investor must know how to deploy and manage a sustainable investment strategy that adds meaningfully to the overall investor portfolio.
2) Mutual funds
Mutual funds are pools of capital that invest into publicly traded equity shares. These pools are regulated by the government and managed by experienced investors. Investors who do not have the time or the tools to pick stocks can invest in share through mutual funds. Mutual funds are structured around themes such as those that invest in a certain size of companies, specific sectors, etc. Mutual funds are regulated by the government regulator (SEBI) and there are regulations that prevent a mutual fund from taking certain types of risks – for example, a mutual fund’s activities must adhere to its scheme and that one particular asset cannot be concentrated in one particular asset. Mutual funds are costlier than direct investing as mutual fund charge some fees for management but the advantage, they bring is that your capital is managed by experts. Mutual Funds do not trade on the stock market. When an investor would like to purchase units in a mutual fund scheme, they have to approach the mutual fund company, either directly or through a distributor, and buy units in a particular scheme. Mutual funds can be open ended or closed ended. An open-ended mutual fund allows an investor to exit any time while a closed ended mutual fund has a lock in period. To exit a mutual fund scheme, an investor has to fill a form and submit to the mutual fund company. After submission of the form, funds are normally credited to the investor within two days.
3) Exchange Traded Funds
ETFs are pools of capital like mutual funds that trade on the stock market. The benefit of investing in such products is that these instruments are diversified across several stocks and not concentrated on any one particular stock. The advantage that ETFs bring over Mutual Funds is that one can trade these instruments real time on the stock exchanges. Similar to Mutual funds, ETFs are costlier than direct investing as ETFs charge some fees for management but the advantage, they bring is that your capital is managed by experts.
4) Registered Investment Advisors
RIAs are professionals who manage capital on behalf of clients. They are regulated by the government regulator and require licenses to practice this profession. RIAs charge fees that may be fixed or dependent on the amount of capital managed. They manage the portfolio on behalf of the risk guidance and return objectives provided by the investor. Usually a certain minimum corpus is necessary before RIAs take on the portfolio to manage. Investing via RIAs can lead to higher fees as to returns as the investor not only has to pay mutual fund fees, brokerage but also RIA advisory fees. However, the major advantage with an RIA is a professional management of one’s funds and expert advice that is tailor made to one’s situation.
5) Signals
There are firms that provide trading ‘calls’ for a fee. Investors can subscribe to such services for a fee. The firm sends the call to the investor through an email, or SMS or messaging services like WhatsApp. The challenges are that the investor may not be able to execute the trade at the exact time when the call is sent. The advantage is that the investor can make investments himself (or herself) and reduce advisory fees. Using signals can be cheaper than using advisors but building a strategy using paid signals carries execution risk.
6) Research reports released by brokerage firms
Brokerage firms release buy and sell focused research reports based on their research. Their motivation is that they can earn brokerage income when their customers agree to trade on these recommendations. Investors can review these reports and make a trade if they are convinced by the research. The advantage is that the investor can make investments himself (or herself) and reduce advisory fees.
7) Portfolio Management Services (PMS)
In a PMS product, an expert advisor takes over your share trading account and attempts to generate superior returns by deploying a particular strategy. A PMS manager manages the execution of trades across the accounts of each customer. The difference between a PMS product and a Mutual Fund is that a mutual fund is regulated and cannot take certain types of risks like being too concentrated in a particular stock. The difference between an RIA led service and a PMS product is that an RIA service is customized to each particular client while a PMS offering is the same across all clients. Because of the riskier nature of PMS offerings, the government regulator (SEBI) allows only HNI investors to invest in PMS offerings. One can invest capital or even provide existing shares to PMS managers. PMS products have high fees, but many PMS products have a strong track record of delivering good returns.
8) Hedge funds
Hedge funds are pooled investment vehicles where investors commit capital for investment over a 5-10-year period. By ‘committing capital; what is meant is that as and when the Hedge Fund asks for capital, the investor must provide the same. The total capital provided by the investor across the life of the Hedge Fund will be lower than or equal to the Committed capital. Hedge Funds use complex investment strategies and the minimum investment size is quite high such that this too as a product is available only to HNIs. These funds are called Hedge Funds as one of the first strategies in the US that made these funds popular included Long-short strategies which provided a hedged aspect to the investments. In India, Hedge Funds are also called AIF – Alternative Investment Funds.
9) International equity
Investing in international equities can be done in following ways:
a) Purchasing ETFs in Indian market that focus on international equities
There are some listed instruments in India that give exposure to international assets overseas. For example, the Nasdaq100 ETF trades on Indian exchanges – this ETF provides
b) Investing internationally directly
The regulator (RBI) allows individuals to transfer capital internationally as part of the LRS (Liberalized Remittance Scheme). As part of LRS, investors are allowed to transfer USD 250,000 abroad each year and they have to provide details of this in their annual tax filing. However, they are not allowed to invest in leveraged products or derivatives. However, taxation of international assets may be slightly different as compared to similar assets that trade within India. The taxation for these international equities will depend on your personal situation and it is best you consult your tax advisor to understand this better.
c) Buying international companies listed in India
There are few companies that are listed in India but have global revenues. Some of these companies can provide Indian investors with international exposure in portfolios.
Disclaimer: Vitspan does not provide any investment related, tax related or financial advice. The information presented is done so without considering the investment objectives, risk profile, or economic circumstances of any reader or investor. The information presented may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the potential loss of principal. Please consult your financial advisor prior to making investment related decisions.