The decision to invest in an equity fund is a big step for many investors. Selecting the right fund can be difficult, especially with so much information available online. From analysing past performance to understanding risk levels and fees, there are numerous factors that come into play when choosing an equity fund. But don’t let these aspects confuse you. With the right research and strategies, you can make sure your hard-earned money is put to work for you in an investment that fits your specific goals!
Let’s look at how to select the best equity funds, highlighting key steps in the process like setting objectives, assessing goal requirements and researching right funds.
1. Fund manager expertise
Fund managers are responsible for selecting stocks and managing the fund’s portfolio. Check if the fund manager has a good track record of delivering consistent returns over the long term. Look for funds with managers who have at least five years of experience and have delivered returns that beat their benchmark. You can thoroughly read the mutual fund offer document to get a good understanding of the manager’s profile and experience.
2. Investment objectives
There are different types of equity funds such as large cap, mid cap, small cap, multi cap and other equity funds. Each scheme comes with its own feature, objective, risk/return profile, and strategy.
You must weigh your investment objectives against the risk and return profile of equity funds available and choose the right one accordingly.
For example, large cap mutual funds invest in blue chip companies and are known for offering stable returns with less risk. While mid cap and small cap funds have high growth and return potential, but they come with relatively higher risks as well. To get exposure to different market capitalizations with a balanced opportunity for growth and stability, you can go for multi cap funds. And if you want both capital appreciation and tax benefits,Equity Linked Savings Scheme (ELSS) can help as it qualifies for tax exemptions under Section 80C of the Indian Income Tax Act.
3. Historical returns
While past performance is not a guarantee of future returns, it is a good indicator of a fund’s performance. Look at the fund’s historical returns over the last 3 to 5 years and compare them to its benchmark and peers. Consider funds that have outperformed their benchmark and funds in the same category for at least 3-4 years. This indicates the fund’s ability to generate returns in different market conditions.
4. Expense ratio
Mutual funds investment incurs an expense ratio, which is the cost of managing the fund. While a lower expense ratio means a larger portion of your investment is working towards generating returns, it should be the only factor to consider.
For example, let’s assume Fund X is offering a 1.75 % expense ratio while Fund Y has a 2% expense ratio. However, Fund Y has consistently delivered higher returns and has a strong track record of outperforming its benchmark. In this case, choosing Fund B, despite its slightly higher expense ratio, would be a wise decision as it offers a better balance between cost and performance.
5. Analyse the fund’s portfolio composition
Assess the fund’s holdings to see the portfolio’s sectoral, stock, and asset allocation. Check if the portfolio is diversified across different sectors, stocks, and market caps. A diversified portfolio reduces the risk associated with concentration in a particular sector or stock and increases the return potential.
6. Evaluate the liquidity and redemption process
Check the fund’s liquidity to understand how easy it is to buy and sell the units. Evaluate the redemption process and see if there are any exit loads and tax implications. Look for funds with high trading volume, as this indicates a more liquid market for the fund’s units.
Ending notes
Selecting the right equity investment needs a thorough and systematic approach. Factors such as the fund’s historical performance, expense ratio, investment strategy, fund manager’s track record, risk profile, and liquidity play an important role in the evaluation process. Assessing these factors can make it possible to make well-informed decisions and maximise the benefits of equity investments.
