Equity Funds Versus Private Equity Investing
Equity market investments typically yield high returns
, particularly if invested over longer periods of time, although such investments are characterized by a high degree of price volatility in the short term. The volatility in our domestic equity markets, particularly in the nineties, reflects significant shifts in the nature of the Indian economy, with the services sector gaining increasing importance. This fundamental change in the economy has resulted in a dramatic change in the nature of our stock markets with the services sector, including technology, assuming increasing importance.Many investors mistakenly assume that they can purchase one or two stocks and they will do well. In the absence of good luck, this can be a dangerous strategy since there is always a risk of a stock declining in value or the business facing company specific problems. The more diversified the portfolio, lower is the risk of one poorly performing stock affecting overall performance of the portfolio. Since there are no set guidelines to identify stocks, it can be especially difficult for an individual investor to achieve a balanced portfolio with adequate exposure to growth and value stocks.
However, a good way of diversifying the portfolio is to invest through equity mutual fund schemes where the professional fund manager and the rigorous investment process is likely to limit risk while optimizing profit, depending on the risk profile of the fund invested in. One way to achieve such diversification could be by investing in growth- and value-styled mutual funds. Mutual Fund managers have extensive research capabilities, and the size of a mutual fund allows them to hold a diversified group of stocks as compared to an individuals portfolio. Mutual funds charge a marginal asset management fees that covers the expenses for managing the fund.
But as financial markets have matured, investors have constantly been on the lookout for customized forms of investing which has led the way for private equity funds. High net worth individuals and institution with a large pool of surplus funds are typically keen to look at investing through equity funds. These funds go into investment pools that represent a source of funding for early-stage, high-risk ventures.
Funds will often get invested into new companies that are likely to achieve significant growth. These companies are generally in the space of new technology like telecommunications, software, hardware, healthcare and biotechnology. Private-equity firms endeavor to add value to these organizations with the objective of making them profitable.
The risk/reward ratio in such kinds of investments is significantly high. Management fees of private-equity investments that cater to smaller set investors can be higher than you would normally expect to pay while investing with equity mutual funds. Additionally, as more and more investors look to go the private-equity way the harder it could become for private-equity firms to locate rewarding investment opportunities.
Since this is a fairly nascent phenomenon, private funds have shorter track records to make a informed judgment on their future performance. Investors should be prepared to commit funds for longer investment horizons; to avoid losing out as companies emerge from their initial phase, to become profitable.
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