We list the most important factors to look for when making an equity mutual fund investment.
Equity mutual funds generate higher returns with a commensurateelement of risk, as compared to debt funds. But do consider the following factors when investing in equities:
* Understand what ‘returns’ means in the context of equity mutual funds.
There is a lot of attention focussed on the ‘returns’ aspect of equity funds in India. It is certainly true that the best equity mutual funds have a high growth potential, and their inherent risk is also lowered with a longer vesting period. However, do understand the basic concept of ‘returns’ when investing in equity funds, and the subtext therein. For example, the fund you are choosing may be recommended to you on the basis of relative performance and not absolute performance.
What this means is that if you need to park more money to lower the negative returns on the fund rather than to build on the actual positive returns, then the fund is more expensive rather than lucrative. The equity mutual fund must generate positive returns instead of merely staying afloat to beat previous benchmarks – you can lose a lot of money with the latter approach.
* A lot of equity funds or diversification across asset classes?
Since equity funds generate a lot of high returns, you might think that buying a lot of different equity mutual funds will enhance the value of your portfolio. This could be true – or not. Do first consider that mutual funds are meant to mitigate the risk of incurring losses. They do this by offering a lot of diversification across different asset classes, vesting period, etc. When it comes to equity mutual funds, you should opt for quality and nature of diversification rather than quantity of equity fund units to ensure growth. Maintaining balance is most important for higher growth in equities.
* Understand what fund management entails.
If you are an experienced investor with considerable exposure to the markets for years now, you might go it alone in terms of investing in the best equity mutual funds in India to meet your future needs. However, not every investor is as adept at judging the markets nor taking the right opportunities that come their way. Which is why they enlist the services of fund managers to advise, monitor and counsel them from time to time. Your portfolio must be steered efficiently during periods of stagnancy or high volatility. Are you certain that you can handle the vagaries of the markets, interpret new data, assess current trends and make the right decisions in line with your goals? If you are not, then you might consider letting an experienced fund manager steer your portfolio for you.