Capital Appreciation
It is the increase in the value of the investment over the market growth. It is also called as capital gain. If the market price increase it will reflect on the asset value, this rise in price of the initial investment or capital is called the appreciation of capital or capital appreciation. Let us take an example to understand
Suppose you purchased 100 shares of a company for Rs.10 each. So you invested Rs.1000 for the shares. After 2 months the share prices increased from Rs.10 to Rs.20 for each share. So if you are selling the shares you will get Rs.2000, which means that Rs.1000 is your capital gain (appreciation).
Capital appreciation = Sale price – Purchase price
How does capital appreciation occur?
There are several factors that influence the capital gain. It can be either natural or due to market fluctuations. For example the oil price may rise due to scarcity, which will result in a capital gain for oil shares. Similarly there is a risk involved in this too. A natural calamity might result in a capital loss.
What is its significance?
It has to be noted that capital appreciation is subjected to tax payment. The appreciated money or gain requires a tax payment. But this comes into effect only if the shares are being sold, unless it is accounted as unrealized gain which is not taxable.
Mutual funds target investments based on capital gains. It is clear that the capital appreciation is subjected to all market risks and its increase is based on several factors. So capital appreciation funds are suitable for risk tolerant investors.
