The world of mutual funds is quite huge, with around 540 equity funds available. This plethora of choices can make it difficult to make a choice. We will help you understand how to select a perfect equity fund.
First of all, let’s start from the beginning. What is the meaning of equity funds? The purpose of equity funds is to invest your money in the equity shares of several companies. The types of companies may vary from the small-cap, mid-cap to large-cap. The task of a fund manager is to allocate funds to these companies. And this allocation depends totally on the fund’s investment objective.
The return that you will acquire at the end depends on the rise or fall of prices of these shares in the market. The long term gains that you will get will be taxed at a rate of 10%. Equity funds are suitable if you are ready to invest for a long term goal.
There are several types of equity funds available in the market. It is necessary to make a meaningful choice while investing. The return that you will acquire purely depends on your selection of equity funds. We will help you out so that you can make an informed choice.
Following are the significant factors that you should consider while choosing an equity fund:
- Risk appetite:
Debt funds are safer than equity funds. While the aggressive hybrid funds are the least risky, he mi-cap and small-cap funds are the riskiest.
Aggressive hybrid funds are a combination of both equity and debt funds. So these are less volatile. Large-cap funds invest in large companies. They tend to deliver moderate returns at low risk. Multi cap funds tend to invest in all types of companies. Investors who can take a higher level of risk should opt for small and mid-cap funds. Funds that invest in just a single sector should be avoided. They offer no diversification at all. There are chances of wild swings too.
- Investment horizon:
It depends on your investment horizon, whether to opt for an equity fund or debt fund. If you have long term goals, over 5 years, then you can go for equity funds. But for the short term, equity proves to be quite volatile. If you do have short term goals, then debt funds will be the best choice.
- Performance of the funds:
If you want to accomplish your goals, then it is necessary to invest in performing funds. Your initial step should be checking the star rating on some popular websites. You must also check the track record of the fund manager and the consistency in performance.
If you have a target or a goal that is several years away, then you need to invest in equity funds. If an investor is retired, then also he can invest in an aggressive hybrid fund, in case he will be needing money ten years later. It is always better and advantageous to begin at an early stage. If you decide to invest when you are young, it will help you to benefit from the true compounding power and strength of equity.
- The ratio of expense:
If you do not have an idea about the expense ratio, then we are here to help. It is a fee charged by the AMC or Asset Management Company from the investor who is responsible for managing a fund. The expense ratio can also include a commission that you need to pay to your broker or distributor. Two similar funds from different AMCs can have different expense ratios. We advise you to opt for a fund that has a lower level of expense ratio. This will enable you to invest more amount of money.
- Tax planning:
One of the most important tasks in pour lives is tax saving. It is a matter of priority for a lot of us. Hence, you can make a tax planning fund a part of your portfolio. Equity Linked Savings Scheme or ELSS would be ideal for you. These are a type of regular equity funds that offer a tax benefit to you under Section 80C. It is very necessary to adhere to making investments in tax saving funds that, too, in a disciplined manner. This will help you do well over time.
So if you are planning to invest in equity funds for a long term purpose, then go through the points mentioned above to avoid any kind of mistake.