How to choose an equity fund

How to choose an equity fund

Six factors you must consider while choosing an equity fund

The mutual fund universe is huge; there are more than 2,500 equity funds available. With this kind of choice, picking a mutual fund is a task in itself. This quick primer will help you understand how to pick an equity fund.

Following are the factors to be considered while choosing an equity fund:



Investment horizon: Your investment horizon determines whether you should go for an equity fund or a debt fund. For long-term goals - those that are more than five years away - equity is the best asset class. While equities are volatile in the short term, over the long term, the volatility is ironed out. For short-term goals, debt funds are the best option.



Risk appetite: While debt funds are generally safe, the riskiness of equity funds varies. Among equity funds, balanced funds are least risky and mid-cap and small-cap ones are the riskiest.



Balanced funds combine both debt and equity and hence are less volatile. Large-cap funds invest in large companies and tend to give moderate returns at a low risk. Multi-cap funds invest in companies of all sizes and are the best equity funds to own to have exposure to companies of all sizes. For investors who can take higher risk, mid- and small-cap funds are the option. Finally, funds investing in just one sector or one theme should be avoided as they can show wild swings and provide no diversification.


Balanced < Large Cap < Diversified Equity < Mid & Small Cap < Sectoral & Thematic





Fund performance: Investing in performing funds is absolutely essential to achieve your goals. You can start by checking the star rating of a fund on


Two other things that you should check are
(i) consistency in performance and
(ii) the fund manager's track record.



Expense ratio: In simple words, it is the fee that an AMC charges the investor for managing a fund. It may also include a commission paid to your broker or distributor. Often it happens that two similar funds from different AMCs have different expense ratio. Your aim should be to go for a fund with a lower expense ratio. That way you will end up investing more money.



Age: If your goal is several years away, you must invest in equity funds. Even if an investor is retired, he can invest in a balanced fund if he is going to need the money, says, ten years later. Still, starting early has its own advantages. Investing when you are young enables you to benefit from the true compounding power of equity.



Tax-planning: Saving income tax is a priority for most of us. Thus, a tax-planning fund, which are also known as ELSS, should be a part of every portfolio. These are nothing but regular equity funds that also give you tax benefit under Section 80C. If you just stick to investing in tax-saving funds in a disciplined manner, you can do very well over time.



A good place to start choosing an equity fund would be the Fund Selector tool, which pretty much aggregates all the necessary information about multiple funds in a single place. Then, of course, there are other useful tools that will help you zero in on the appropriate fund(s).

 

Happy investing

Source:Valueresearchonline.com