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December 1, 2021
Finance

Know how to choose the Best Equity Mutual Fund

The mutual fund industry witnessed a large number of new investors every day. There is a lot of buzz surrounding mutual fund investing especially because of a lot of government initiatives to spread awareness about its benefits. For first-time investors, choosing the right mutual fund scheme can get a bit confusing especially because of the number of investment options available. As of now, there are more than a thousand different mutual fund schemes offered by numerous Asset Management Companies and fund houses. Thus, it is important that investors do proper research and understand what the fund is all about and make an informed investment decision.

Here’s how you should assess an equity mutual fund scheme before investing:

Understand what equity mutual funds are

An equity fund is an open ended mutual fund scheme that aims at generating capital appreciation over the long term by predominantly investing in equity and equity related instruments of publicly listed companies. Of its total investible corpus, an equity fund may invest anywhere between 65 percent to 80 percent in stocks.

Decide which equity fund you want to invest

There are various product categories under equity schemes and investors must be sure about where they want to invest their hard-earned money. For example, a large cap fund is an equity fund that invests majorly in blue chip stocks. A flexi cap fund invests 65 percent of its total corpus in large, mid, and small cap stocks. A thematic/sectoral fund invests in companies belonging to a sector or industry eg. Petroleum, gas, electric vehicles, etc. Similarly, there are numerous equity funds with unique investment objectives. Investors must ensure that they choose an equity fund whose investment objective aligns with that of theirs.

You can even save tax with equity funds

If your top priority for investing in equity funds is to save tax, then you need to consider ELSS. Equity Linked Savings Scheme (ELSS) is a tax saver fund that comes with a predetermined lock-in period of three years. It falls under Section 80C of the Indian Income Tax Act, 1961 that allows an individual to invest up to Rs. 1.5 lakhs in this tax saving scheme and bring down their overall tax liability. ELSS has the shortest lock-in period among other tax saving instruments which makes it ideal for investors who do not want their money to be locked in for longer durations.

Decide from direct and regular plan options

Equity funds are available in direct and regular plans. A direct plan has a low expense ratio as it can be directly brought from the AMC. A regular plan is made available by mutual fund agents and other third party aggregators who charge a commission fee. Thus, regular plans have a high expense ratio than direct equity mutual fund plans.

What is the fund’s ideal investment horizon?

Every mutual fund scheme requires a certain time frame to show its true potential. Investors are often restless with their equity investments and are keen on withdrawing their investments in a short time. Equity mutual funds need time to grow and are ideal for those with an investment horizon of five years or more. Thus, investors must ensure that they are willing to remain invested for an investment horizon that the equity fund demands.

Use SIP calculator

To understand how much returns an equity fund will offer you via SIP investment over a certain time frame, investors can use the SIP calculator which is a free online tool that computes results in a jiffy. Enter a few details like investment tenure, the equity scheme’s expected rate of return, and the corpus needed and the calculator will display the monthly SIP sum that one needs to invest to achieve their financial goal.                                                                                                                                                                                                                                                                                                           

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