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Do you invest in equity mutual funds? If you, then have you watched your portfolio for some continued days? If you do so you may find that the value of your portfolio keeps changing, sometimes it goes up, and sometimes it goes down. Have you ever wondered why it happens!

Well, we know that investing in mutual funds means participating in equity stocks indirectly. This quite may be a reason taken behind the constant change in the value of the equity fund portfolio. However, this can be best understood if we primarily know that how does an equity mutual fund actually invest!

Let us understand what an equity mutual fund does with the money they collect from you and me.

Where Does An Equity Mutual Fund Actually Invest?

The money that equity mutual fund scheme collects from you and me, they use it to buy shares of different companies and becomes a shareholder of every company they buy shares of. As a shareholder, they basically own a part or piece of that company.

Typically, an equity mutual fund portfolio, invest in around 40-50 companies, however, some specific fund portfolio has an investment in less than 30 companies while some have their investment in nearly 100 companies.

Who Selects The Companies To Invest In Share Of?

The fund manager of that specific equity mutual fund scheme and his assigned team do various research and analysis and then decide the companies in whose shares the fund will be investing and how much will be invested in these shares and when.

How do the fund manager and his team pick out the companies to invest in a share of? 

The first shortlist companies from the pool of over 5,500 listed companies on the two stock exchanges that is BSE and NSE. After they start analyzing the fund and mainly focus on companies with sound business models, strong growth opportunities, sustainable competitive advantages, and quality management.

After the research of the business fundamentals of the shortlisted companies through regular interactions with their management, employees, customers, competitors, and independent industry professionals. The fund management team will also study industry reports and news to do an in-depth analysis of the industry, regulations, business, strategy, and corporate governance issues. This will lead to detailed financial analysis and forecasts.

Then they look forward, building a further subset of chosen companies and value their shares based on the business fundamentals and growth prospects. These valuation methods can change depending on the industry and market situation, as well as the fund manager.

After that comes the construction of the fund portfolio by sizing how much to invest in each share based on how convincing the argument is, based on all of the inputs above, as well as ensuring the portfolio is adequately balanced, to do well at various points in time, as the prospects of the economy and various industries evolve. And in the last, they present the investment recommendations to the investment committee of the fund with a clear rationale.

As you can see, that’s a lot of work and professional fund managers dedicate their life to becoming better at this. That simply means for an individual with a full-time job, it is too difficult, if not impossible, to gain the kind of expertise they bring to work for our investments.

This is the prominent reason why a mutual fund investors especially when he is new to the sector to go investing in regular plan of mutual funds instead of direct plans and get the benefits of expertise management.

How Does All This Effect The Value Of My Equity Fund Portfolio?

When the fund invests the money collected from you and me, they do it expecting those share prices to increase over time. As companies grow their business, their value increases and so does their share price.

The value of an equity mutual fund is the total value of all the shares it holds. Since share prices change daily, so does the value of the fund.

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For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).