With 12 distinct kinds of equity fund categories and over 500 equity mutual fund schemes available in the market, picking the correct mutual fund may be a difficult task for you.
Here’s a quick guide on factors you must consider when selecting an equity mutual fund for your investment portfolio.
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Investment time frame
Your investment time frame allows you to decide if you should opt for equity, debt, or hybrid mutual funds. For long-term financial goals, i.e., those maturing after five years, equity is a prudent asset class to invest in. While equity may be volatile over the short run, over the long run, the losses owing to volatility are recouped. For short term financial goals i.e., those maturing within three years, you must opt for debt funds to get the benefit of capital protection, high liquidity, and satisfactory returns. For mid-term financial goals ranging between three and five years, hybrid mutual funds are a prudent choice.
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Risk tolerance level
While debt mutual funds are usually safe, the risk involved in distinct equity mutual fund categories may differ. Among equity mutual funds, large-cap and flexi-cap equity funds hold minimal risk while small-cap and mid-cap are the riskiest. Large-cap equity mutual funds invest in big companies and often provide you with moderate returns at reduced risk. Flexi-cap equity funds, in contrast, invest in organisations of distinct sizes.
If you are a high-risk appetite investor, then you can take exposure in small-cap and mid-cap equity funds. Lastly, equity funds investing in only one theme or sector must be avoided as they witness wild swings and offer no diversification.
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Performance of the fund
Investing in well-performing equity funds is essential to attain your long-term financial goals within the set deadline. Note thatreviewing the past performance of equity funds is no indicator determining the same outperformance to happen in the future. However, reviewing the past performance allows you to know how the equity funds fared throughout distinct market cycles. Two other important things you must ensure to review are consistency in fund’s performance and fund manager’s reputation and track record.
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Expense ratio
Expense ratio refers to the charge that AMC (asset management company) levies on you as an investor for managing the equity fund. It might even involve the commission paid to distributors or brokers. Often it may happen that two alike equity funds from distinct AMCs may have distinct expense ratios. Your aim must be to invest in the equity fund with excellent past performance and lower expense ratios. In this way, you may end up generating higher corpus over the long term.
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Age
If your financial goal is many years away, then you must opt for the equity mutual fund to invest your money to generate adequate corpus. Even if you are a retired investor, you must consider investing in a large-cap or flexi-cap mutual fund in case you require the corpus, say, seven to ten years down the line. This is because starting early your investments in equity funds allows you to avail the benefit of compounding and generate higher returns over the long term.
Ending note
Equity mutual funds, like any market investment, come with some risk. You can easily meet such risks by following the above-mentioned tips. Using the above tips, you may be able to select the ideal equity scheme as per your risk appetite, financial goal, and investment horizon. Also, remember if you choose to invest in equity funds, being invested for long term is a must to generate adequate corpus.