Things To Know Before Investing in Equity Funds
Description: Investors often need clarification when it comes to investing in various equity funds. So, here are some pointers to remember when investing in such funds to make an informed decision.
Investors often need clarification when investing in mutual funds due to the abundance of options available. Each fund has advantages and disadvantages, but since investors have different objectives and requirements, they should align their investments with their specific goals.
However, before diving into the world of mutual fund investments, it is crucial to determine the fund category, such as equity, debt, or hybrid funds, along with their respective sub-categories. Subsequently, investors can select from a range of funds based on specific parameters.
This blog explores the essential factors investors should consider before allocating their funds to mutual investments. However, you must first have a clear understanding of what are equity mutual funds.
What Do You Mean by Equity Mutual Funds?
Are you willing to know what are equity mutual funds? An equity mutual fund primarily invests in a diverse range of company stocks with the goal of generating returns. Investing in equity funds carries a higher level of risk compared to other types of mutual funds. Furthermore, it’s important to note that equity funds are not universally suitable for every investor. They come in various types based on their investment objectives, and it’s crucial to align them with your risk profile.
6 Things to Know Before Investing in Equity Funds
Just like when we make significant purchases, such as buying a home appliance, we conduct thorough research and evaluate each component before deciding. This knowledge helps us have a satisfying experience with our purchase. The same principle applies to investing in equity funds. Since you know what are equity mutual funds, it’s essential to consider certain factors that will contribute to a rewarding investment experience. Here are the key factors to keep in mind when investing in equity funds.
The mutual fund’s size refers to its total assets under management (AuM). Although there is no specific definition of an ideal fund size, both excessively large and extremely small funds can impact the fund’s performance. One approach to evaluating fund size is by comparing the category average to the AuM.
As an investor, you are responsible for bearing the fund management cost, typically charged as the expense ratio. Active managed funds generally have higher expense ratios than passively managed funds. It is important to review and compare a fund’s expense ratio with its category average to make an informed investment decision.
Importance Of Pedigree and Length of Existence
Opting for established and reputable names that have demonstrated long-term success is generally a wise choice. As the saying goes, it’s often preferable to stick with a familiar devil rather than an unfamiliar angel. It is essential to verify that the equity funds you intend to invest in has a track record of at least 15 years in the Indian market. This longevity indicates that the fund has weathered multiple market cycles and has demonstrated its ability to endure over time.
Invest In the Right Mutual Fund
It is crucial to align your investment in equity funds with your financial goals and risk tolerance. For instance, if you are a conservative investor aiming for regular income and capital preservation, investing in suitable debt funds would be appropriate to fulfil your investment objectives.
On the other hand, if your goal is capital appreciation over a period of time, investing in equity funds may be suitable. Equity mutual funds are more suitable for aggressive investors whose risk tolerance matches the investment strategy. However, conservative investors may prefer allocating their equity funds to debt funds rather than equity funds.
Rebalance Your Portfolio Occasionally
Rebalancing is the process of readjusting your portfolio to its original asset allocation mix. This ensures that the portfolio doesn’t become overly skewed towards certain asset categories but instead maintains a comfortable risk level.
You can choose to rebalance your portfolio either based on a fixed time interval or when specific investments require adjustment. Some experts recommend rebalancing every six or twelve months as a regular reminder. This method benefits from the calendar as a guide for rebalancing. Alternatively, you can opt for rebalancing when the relative weight of an asset class changes by a predetermined percentage. This method relies on your investments themselves, signalling the need for rebalancing. Regardless of the chosen approach, infrequent rebalancing tends to be more effective.
Direct Plans Generate Higher Returns
The expense ratio is the key factor to consider before investing in a mutual fund, where the direct plan typically has lower costs than standard plans. Direct plans tend to offer better and higher returns than standard plans.
Some investors mistakenly believe that there are significant differences between direct plans and standard plans of equity funds. However, both plans are essentially the same for a specific scheme.
The primary distinction lies in the absence of brokers or agents in direct plans, resulting in no commissions or brokerage fees. As a result, direct plans offer lower annual costs and reduced fund expenses, allowing you to save on your investments.
Ultimately, it’s important to remember that investing in equity funds requires discipline and time. By mastering these two factors and harnessing the power of compounding, mutual funds can effectively assist you in overcoming any potential financial challenges that may arise in the future.