Six Factors To Consider When Choosing An Equity Fund

Mutual funds are a pool of professionally managed funds that offer active risk management. Asset Management Companies owning mutual fund collect money from investors sharing a common investment objective and invest this pool of funds across the foreign and Indian economy. Depending on the nature of the scheme and its investment objective, a mutual fund may invest across various asset classes and money market instruments like equity, debt, gold, real estate, G-Sec, company fixed deposits, commercial papers, etc. The performance of a mutual fund scheme highly depends on the performance of its underlying assets and the various sectors and industries in which it invests. 

Thanks to categorization by market regulator SEBI (Securities and Exchange Board of India), investors can now distinguish between various existing schemes and take an informed investment decision. Asset allocation strategy, risk profile, investment objective is some of the factors that define mutual fund schemes from each other. Equity, debt, solution oriented, hybrid, gold, ETFs etc. are some of the major mutual fund categories that attract Indian investors.’

What are equity funds?

Equity funds are mutual fund schemes that predominantly invest in company stocks and equity related instruments. One single unit of an equity fund is a combination of multiple expensive stocks. Investors get an opportunity to own expensive stocks in small quantities through investments in equity schemes. An equity fund may invest a minimum of 80 to 85 percent of its total assets in equity and equity related instruments for income generation.

Six factors to consider before investing in an equity fund

Investment objective – The investment market is flooded with multiple equity schemes.  Hence, it is necessary to choose an equity fund whose investment objective aligns with that of yours. An equity fund is an equity oriented scheme predominantly investing in equities. One needs to have a moderately risk appetite and a long term investment horizon can to invest in equity funds.

Risk appetite – Remember that equity funds predominantly invest in company stocks. Investments made in equity schemes are exposed to market volatility. A risk appetite is nothing but an investor’s ability to bear certain amount of losses in anticipation of earning capital gains over the long term. 

Track record of the equity fund – A equity mutual fund with a proven track record and consistent returns might be ideal for long term investment. However, investors should bear in mind that past or historical data of any fund doesn’t replicate its present or future. However, a low but consistent performing equity fund is far better than a top performing fund.

Fund manager – If is the duty of the fund manager/s to use their years of experience in implementing a feasible investment strategy for the equity fund. AMCs hire reputed fund managers use their expertise to move money in the direction where there’s potential market growth. Fund managers must help the equity fund beat its underlying index and help investors generate capital appreciation.  

Expense ratio – An expense ratio is nothing but the cost of owning a fund and it may have an impact on the returns provided by the scheme. You might invest in a fund that is continuously providing high returns, but remember the higher your profits, the higher will be the expense ratio. Hence you should also be aware of the expense ratio being charged by the equity fund.

Exit load – Exit load refers to the fee levied by an Asset Management Company from the investor during the time of the redemption of their equity fund unit. If an equity fund has a higher exit load, it might affect the investor’s long term capital gains. 

Equity funds do not guarantee capital gains. Hence, investors should consult a financial advisor before investing.