Five factors you must consider while choosing an equity fund
The reason most of us consider investing some of our savings is so that in the long run, those investments grow and help us in improving our existing financial condition. However, investors must ensure that they choose the right type of scheme that is aligned with their investment objective, risk appetite, and investment horizon. Investing in equity mutual funds can be rewarding. These are market-linked schemes that invest the majority of their investible corpus in equity and equity-related instruments of publicly listed companies.
So, if you too want to diversify your investment portfolio with equity mutual funds and gradually climb the ladder of wealth creation, here are a few things that you need to understand before investing –
- Equity funds do not guarantee returns
Although it is true that historically equity mutual funds have outperformed all other types of conventional schemes in terms of income generation, they do not guarantee returns. The returns generated by equity funds are market-linked and when the equity markets turn volatile there are chances that your portfolio may incur a few losses as well. Thus, investors who consider equity funds must be aware that although these funds have a high-risk returns tradeoff, they can also prove to be volatile in the short run.
- Expense ratio and exit load
You do not want to invest in an equity fund that has a high expense ratio. The expense ratio is nothing but a bunch of recurring costs like management fees, operational costs, etc. that the AMC must take care of. However, expense ratios are deducted from the investor’s capital gains and are not something which they are charged separately. However, there are some expenses like the exit load or tax implications which the investor might be charged if the investor exits the equity investment. Investors must make sure that they are well aware of all the expenses related to the equity mutual fund scheme they are about to invest in.
- Fund manager and management
The fund manager plays a crucial role in ensuring that the equity scheme can generate risk adjusted returns and, in the process, able to outperform its underlying benchmark. When choosing an equity fund, investors need to ensure that they choose a scheme that is under credible fund management. Investors must only consider investing in equity funds that are owned by a SEBI registered Asset Management Company or fund house. The experience and the longevity of the fund management matter too.
- Investment objective
Every equity mutual fund has a different investment objective and asset allocation. Some invest in large caps, some in mid-caps fund, some are sector-specific while some invest across market capitalization. Which type of equity portfolio suits your investment objective better? Investors need to ask this question before investing in any equity scheme so that they are on the right track of long-term wealth creation.
- Past performance of the fund
Every mutual fund has a disclaimer – “Past performance of the scheme may or may not be sustained in the future”. Then why consider the equity fund’s past performance? Because the fund has been able to perform consistently in the past, this might give investors the confidence to invest in that fund. It also shows the fund manager’s credibility to generate consistent returns. If the fund has been able to perform even in volatile markets and given risk adjusted returns, it might be able to continue with the same performance shortly as well.