3 approaches to equity investing

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Investing in equity and equity related instruments provides growth with the power of compounding. Depending upon the capital size and risk appetite of the investor, following are some of the ways to invest in equity instruments.

Equity mutual funds
Mutual funds are one of the safest ways of investing in equities. Such investments can be made in index funds. Then large-cap or diversified equity funds can be added to the portfolio. Investments in sectoral funds or mid-cap or small-cap funds can be made to the extent of a smaller proportion in the portfolio, depending on the age and life stage of the investor. Investments can be made by signing up for SIPs or by making lump sum investments.

Equity shares
Investors who have knowledge about equities and are able to follow fundamental analysis of companies can invest directly into shares of companies. However, one needs to monitor the performance of these investments and then take calls on adding to or exiting the investment. Such investments can be made by simply opening a demat account with a trading account.

Portfolio management schemes (PMS)
High net worth individuals also have the option to engage the services of Sebi registered portfolio managers who enter into a portfolio management agreement with the individuals and manage their funds in line with the objectives. This is a high risk, high return investment option and entails investment of a minimum of Rs 50 lakh. It is important to understand the scope of such investments as well as the fees to be paid to the portfolio manager for the same.

Points to note

  • While all the above approaches are in the increasing order of risk, it is important to note that equity investments inherently are risky assets.
  • Consult your tax adviser to understand the most suitable approach with respect to your income and expenses as each of the modes have different tax implications.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)