Mutual funds can be rewarding if you invest in the right type of scheme keeping a long term investment horizon. It is important to invest in a mutual fund that is apt for your goals because people are emotionally attached to their goals and would remain committed to their investments to achieve them. Equity mutual funds may carry a high risk profile but over the long term they have offered returns far better than any other investment vehicle.
Here are a few things to keep in mind while choosing an equity mutual fund scheme:
Understand your investment horizon
Investors who are clear about how many years they want to remain invested with their finances will be able to determine if their investment horizon allows them to invest in a debt scheme or in an equity scheme. If you are young and recently kicked off their professional career, such individuals usually have 25-30 years in their hands. For such individuals, investing in an equity scheme might make more sense because they have more years in hand, and this will allow their investment amount to compound over years and snowball into a commendable corpus.
Do you have an appetite for risk?
As the name suggest, equity funds allocated majority of their investible corpus in company stocks and other equity related instruments. This by default makes them an extremely high risk investment. Investors should determine their risk appetite before investing in equity funds. Consider investing only if your risk appetite allows you to do so. Equity funds do not guarantee capital appreciation. In fact, over the short term your portfolio can even incur losses. One must only invest an amount they can afford to lose if market volatility strikes hard.
Check for the fund’s expense ratio
If you are investing in actively managed equity funds, you must make sure that you invest in a scheme whose expense ratio isn’t high. An expense ratio comprises all the recurring costs which the fund house must take care of so that the scheme is able to function smoothly. If you invest in a scheme that has a high expense ratio, it will have an impact on your long term capital gains. So, it is better to opt for an equity fund that has a feasible expense ratio. Do compare the expense ratio of similar schemes offered by different fund houses to determine which equity fund is worth investing.
Every mutual fund scheme has an investment objective which it aims at achieving at some point of time in future. Based on the scheme’s investment objective the fund manager builds an underlying portfolio of securities which might help the equity fund outperform its underlying benchmark. Similarly, retail investors must understand what their investment objective is and then consider investing in a scheme whose investment objective aligns with that of theirs. For example, if your investment objective is to save tax and earn long term capital appreciation, you might want to consider investing in a ELSS fund. On the other hand, if your primary investment objective is to build an emergency fund to sail over life’s unforeseen emergencies, then you might want to consider investing in a liquid or an overnight fund.
There are so many equity mutual funds out there that sometimes making an investment decision can become a task in itself. Investors must take their time and should not rush towards investing their hard earned money.