A steady rise in financial awareness and declining returns from the fixed income avenues have attracted many to invest in equity schemes over the past few years. In case you too are new to equity funds or contemplating an exposure to equity oriented mutual funds, here is a step-by-step approach to help you find the right fund.
Align your investments as per your life goals
Lining up your investment with life goals will assist you to decide your month-on-month investments and investment horizon. Setting an investment horizon as per your goals will assist you to estimate your investment category whether debt or equity-oriented funds. Choose equity schemes, if your life goal is 5 years and above as equities in the short run are extremely volatile but in the long run, have the possibility to beat inflation ansd fixed income avenues by a wide margin. Investing in equity schemes can form bigger corpora to meet your long-term life goals. These life goals may include corpus generation for your post retirement life, a child’s higher education or marriage, down payment for a dream home, etc. Similarly, in case your life goal is below 5 years, you may opt for debt funds. It is because debt funds hold higher income certainty than equities.
Assess your investment objectives and strategies of funds
All the equity schemes clearly state their investment goals, strategies, asset allocation, and fund management styles. Assessing your equity investment goals and strategies before investing will allow you to understand whether the fund is the right match as per your life goals and risk tolerance level. You can get the objective and strategy of the fund in SID (scheme information document), KIM (key investment memorandum), product leaflets, product presentations, and other product literature.
Review the previous fund’s performance
You must ensure to strike a comparison of the fund’s past performance with its peer funds and benchmark indices over periods like 1, 3, 5 years. While previous fund’s performance does not assure similar performance to happen in the future, an in-depth comparison can help you understand how the fund performed the market and economic conditions previously as compared to their benchmark index and peer funds.
Consider the fund’s expense ratio
The mutual fund schemes expense ratio is the proportion of their average daily net assets utilized for mitigating their operating expenses. Such operating expenses may include commissions paid to distributors, legal and audit fees, management and advisory fees, transfer, and registrar agent fees, selling and marketing expenditures, etc.
As a lower expense ratio signifies a higher fund amount will remain invested in an equity fund for future compounding and growth, ensure to invest in the direct plan as it has a lower expense ratio than the regular plan. While outperformance in returns might seem extremely marginal in the beginning years, the difference in both the plans’ corpus can become substantial over the long-term owing to the compounding effect.
Review the reputation and experience of the fund house
While many retail investors endow higher importance to the fund managers when assessing the fund’s potential, the fund houses and investment philosophies also play a crucial role in determining its future performance. A good fund house endows higher importance on forming a robust organizational process and fund management teams in place of just relying on the fund managers. Thus, even if the performing fund manager exits the fund house on receiving a better opportunity, the strong organizational procedure of the fund house can assure continued outperformance of the fund. Likewise, a fund house having rich experience in all types of market cycles will be in a better position to face the economic downturns and volatilities in the market.
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