Equity funds offer a great way to access the stock market and form an important part of a well-rounded investment strategy. With the potential to provide growth, appreciation, and dividends over time along with various advantages such as professional management and diversification, equity funds can be a powerful tool for reaching your financial goals. But the key here is to find the right mix of stocks to maximise returns while minimising risk levels.
This can be challenging since there are various types of equity funds available for everyone’s particular situation and risk tolerance level. That’s why understanding which mutual funds to choose is essential for any investor looking for a successful overall investment strategy. To get started, here is a list of a few golden rules for selecting the best equity funds.
- Risk appetite
Before you invest in equity funds, you must know your risk appetite and preferences. Large-cap funds offer capital appreciation with relatively low risk since they invest in large, well-established companies (top 100 listed on stock exchanges by market capitalization), while small-cap funds carry a higher risk as they invest in small companies with higher potential for greater returns or losses. Mid-cap funds offer the ideal balance between risk and reward and are particularly suitable for investors with moderately high-risk appetites. Multi-cap funds provide diversification across all market capitalisations (large, small, and mid-cap stocks), allowing investors to benefit from different types of investments and sectors.
Knowing which type of equity mutual fund best suits your investment objectives and risk appetite will help you achieve better returns on your investments in equity markets over time.
- Expense ratio
When selecting an equity fund for your portfolio, one of the most important rules is to check the expense ratio. Expense ratios can vary significantly across different asset management companies (AMCs). It’s important to make sure that you are not paying a higher fee for a similar fund across other AMCs – this fee impacts your returns and can reduce your profits. So, when comparing funds from different AMCs, look at their expense ratios, and aim for a fund with a lower ratio if possible.
- Comparing fund performance
It is important to benchmark each equity fund as market returns vary widely – a good investment today may not perform as well when compared to other options in a few weeks or months. Furthermore, try to identify whether the manager or their strategy has changed due to factors like ownership stakes or adverse market conditions; this could impact a fund’s performance. Finally, evaluate past long and short-term performance volatility, which can play into expected risk levels for any given selection.
Also, you should make reasonable comparisons. For example, comparing large-cap funds with mid or small-cap funds will lead to an inaccurate result as each carries different risk and return profiles due to the different kinds of underlying stocks.
- For tax planning
If you want to save on taxes through an equity fund investment, then ELSS or Equity Linked Savings Scheme is an option you should consider. ELSS is strategically designed to allow investors to experience long-term capital appreciation along with the benefit of income tax savings under Section 80C of the Income Tax Act. It also offers a shorter lock-in period (3 years) than other investment products such as Public Provident Fund (PPF).
Besides the points mentioned above, it is equally important to focus on other golden rules for choosing the right equity funds such as – reading the fund’s prospectus, having a clear investment goal, considering your age, and entry and exit loads. Once those are all taken care of, you can invest in equity funds online through a lump sum or SIP as per your preferences and make steady progress towards achieving your financial goals.