Equity & ETFs
Equity and ETF allow investors to participate directly in the stock market and take benefit of market appreciation. While equities represent direct ownership in a specific company, ETFs offer a more diversified approach, providing investors with exposure to a broader market.
Equity investments essentially mean purchasing shares of a company, making the investor a partial owner of that company. The primary goal of investing in equities is capital appreciation, though many companies also offer dividends as a form of income to shareholders. Equities are known for their potential to deliver high returns over the long term, but they also come with a higher degree of risk compared to other asset classes.
Exchange-Traded Funds (ETFs), on the other hand, are investment funds that are traded on stock exchanges, much like individual stocks. An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep its trading close to its net asset value. ETFs combine the diversification benefits of mutual funds with the liquidity and trading flexibility of stocks.
Options Available The landscape of equity and ETF investments is broad and varied, catering to different investor needs and risk appetites:
Equity Investments
There is virtually no limit to what you can invest in. Thus, it often requires experience, expertise, and knowledge to research and invest in the right companies based on your expectations. One can invest in large, mid, or small companies, sector-specific companies and even new ones through IPOs.
Exchange-Traded Funds (ETFs)
Amongst the options available are (i) Equity ETFs, which can be based on market-cap or sector (ii) Index ETFs, which are linked to common indices (iii) Commodity ETFs, linked to commodities like gold, silver, etc. (iv) Debt ETFs, which invest in fixed income securities, and (v) Global ETFs, which allow exposure to global indices.
Investment Strategies
One can create a portfolio of equity and ETFs according to one’s investment objective, which can be any single strategy or a combination of strategies. Some of the popular investment strategies are growth investing, value investing, passive investing, momentum investing, and dividend investing.
Equity Investments
One can consider equity and ETF investments as part of the investment portfolio for several reasons.
Potential for High Returns
Equities and ETFs have historically provided higher returns compared to other asset classes over the long term. They are suitable for wealth creation and achieving long-term financial goals.
Diversification
Investing in a mix of equities and ETFs can help diversify your portfolio, spreading risk across various sectors, industries, and asset classes. ETFs inherently provide the benefit of diversification by holding a basket of securities.
Liquidity
Both equities and ETFs offer high liquidity, allowing investors to buy and sell shares quickly and easily during market hours. This flexibility is crucial for managing investment portfolios and responding to market conditions.
Cost Efficiency
ETFs often have lower expense ratios compared to mutual funds, making them a cost-effective way to gain diversified exposure to markets. Additionally, the trading flexibility of ETFs allows for efficient portfolio management.
Transparency
Equity and ETFs, by nature, are more transparent than mutual funds, as their holdings are readily available. This transparency allows investors to know exactly what they own and make informed investment decisions.
Accessibility
With a wide range of options available, investors can easily find equities and ETFs that match their investment objectives, risk tolerance, and time horizon.
Who should consider investing directly in Equities & ETFs?
Equity and ETF investments are versatile and suitable for a broad spectrum of investors, each with unique financial goals and risk profiles:
Experienced Investors
Equity is essentially a high-risk asset class and one needs to have adequate experience, expertise, and knowledge to find good companies to invest in for the long-term. Direct equity exposure is not recommended for new investors who can preferably invest in mutual funds or ETFs first to gain some experience.
Long-Term Investors
Those with a long-term investment horizon can benefit significantly from the growth potential of equities and ETFs. Over time, these investments can compound and contribute to substantial wealth creation.
Risk-Tolerant Investors
Investors willing to take on higher risk for the potential of higher returns may find equity investments appealing as they can offer significant growth opportunities.
Cost Efficiency
ETFs often have lower expense ratios compared to mutual funds, making them a cost-effective way to gain diversified exposure to markets. Additionally, the trading flexibility of ETFs allows for efficient portfolio management.
New Investors
ETFs, along with mutual funds, are ideal for new investors due to their diversification, low cost, and ease of investing. They can be suitable for investors looking to build wealth over the long term with a carefully selected portfolio.
Why SWP?
Mutual fund investments are susceptible to market fluctuations, which can have a negative impact on the fund’s Net Asset Value (NAV). This is particularly crucial when approaching a financial need, as the fund returns may fluctuate if not withdrawn in a timely manner. However, with SWP, investors can strategically time their withdrawals to align with their financial needs. If an individual has invested in a mutual fund to fulfil specific needs, SWP serves as an excellent option to ensure that the funds are available when required. By employing SWP, investors can attain their financial objectives promptly without experiencing any cash shortages due to adverse market movements.
Benefits of SWP
- Post-retirement income – SWPs prove to be extremely beneficial for retirees who lack a pension or other regular income sources. It provides them with a reliable and consistent income stream that can effectively manage their post-retirement spending and financial needs.
- Additional source of income – SWP is not limited to retirees, it also serves as an excellent option for anyone who desires an additional source of income alongside their job salary or business profits. By implementing SWP, investors can receive supplementary income on a monthly, quarterly, or annual basis, tailored to their specific requirements. It can even be designed to meet household expenses, retired parent’s support income, kid’s school fees or pocket money and so on.
- Disciplined withdrawals – SWP instils a sense of discipline in investors’ approach to managing their investments. Regardless of market conditions or emotional sentiment, SWP systematically withdraws a predetermined number of units from mutual funds each month to cover monthly expenses. This approach acts as a protective shield, preventing impulsive and substantial withdrawals based on market volatility or emotional decision-making.
- Rupee-Cost Averaging – With SWP, a predetermined number of units are redeemed regularly. During favourable market conditions or the bullish phase, fewer units are redeemed, whereas during adverse conditions or the bearish phase, more units are redeemed. This strategy helps to average out returns over time, safeguarding investors from potential financial losses if units are sold during a market downturn.
- Tax Benefits – SWP offers tax advantages for investors. The amount withdrawn through SWP is considered a combination of capital and income. Tax liability is applicable only to the income component and not the capital component. Additionally, SWP withdrawals do not attract TDS, unlike Fixed Deposits (FDs). However, it’s important to note that capital gains tax may apply based on the type of scheme and withdrawal amount. For instance
Fund Type Short-term capital gains tax Long-term capital gains tax Debt fund As per the tax slab 20% after indexation Equity fund 15% 10% after indexation
Incorporating SWP into an investment strategy not only ensures a steady income stream but also promotes disciplined financial planning, providing stability and flexibility to investors. Whether it’s for retirees seeking post-retirement income or individuals desiring an additional income source, SWP offers an effective and structured approach to fulfilling financial needs and managing cash flow. By considering rupee cost averaging and tax benefits, investors can make informed decisions when incorporating SWP into their investment strategy, ultimately enhancing their financial outcomes.
To conclude, SWPs in mutual funds serve as an effective means of generating a regular income stream. Whether you are an experienced investor or new to the world of financial management, SWP can be a valuable addition to your portfolio. However, it is important to plan SWP implementation carefully, considering your financial needs. A mutual fund distributor can guide you through the entire process of investing as well as implementing SWP to generate passive income, hence, allowing you to enjoy returns while eliminating worries. By incorporating SWP into your investment strategy with the guidance of a mutual fund distributor, you can achieve financial stability and fulfil your long-term needs.