Consider these factors before selecting an equity mutual fund

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Just like ignoring your financial and lifestyle needs can prove detrimental to your financial well being, ignoring or getting stuck with an unworthy scheme can cost you a lot in the long term. To start with, selecting inaccurate equity mutual fund schemes can take you far away from your set objectives and goals.

Further, you may lose track of your target returns on your equity mutual fund schemes. Not to forget the chances of going wrong while selecting from more than 400 plus equity funds available to invest. Below are few factors to consider before selecting an equity mutual fund:

Clarity of investment horizon

Investment horizon plays a vital role while deciding whether you should go for an equity fund or debt fund. You can start by dividing your goals into long-term and short-term goals. For instance, if your long-term goal is more than five years long, you should always incorporate investment in equity as an asset class. Equity for a short-term goal would always be volatile; however, if invested for the longer term, the volatility is levelled out. For short-term goals, debt funds are a good option with less risk.

Understand your risk appetite

Risk and reward always go hand in hand. So, if you invest in a sectoral fund and have a low-risk appetite, you might like to reconsider it. Sectoral funds, by nature, have a high risk and reward attached to them. Similarly, debt funds are generally considered safe and cater to the need of investors, especially who have a low-risk appetite.

For investors who have a higher risk tolerance can invest in mid-cap and small-cap funds in equity mutual funds. That said, large-cap funds invest in large companies and usually give moderate returns at low risk. However, for investors who want to have exposure to all sizes of companies can go for flexi mutual funds as they are considered a great equity fund option.

Expense ratio

The expense ratio refers to the fees that an asset management company charges for managing a fund. No two fund houses have a similar expense ratio. You should access or research on a scheme that has a lower expense ratio. Hence it is imperative to check the expense ratio, or else you will end up investing more money.

Check funds performance

Even after selecting an equity fund with careful risk and goals assessments, chances still remain that although that particular scheme would seem attractive on the basis of its features and other tax benefits, the fund might be underperforming than its own objectives and business strategy.

One should always check not only the past returns but also how consistent those returns have been over the past years. Usually, two parameters like the fund’s consistent performance, track record of the fund manager, and checking the ratings of the fund can save you from selecting the wrong equity scheme.

The pivotal role of your age

Believe it or not, your age plays a major role when it comes to investing in equity mutual funds. Investing early in equity mutual funds enable you to reap benefit from the power of compounding of equity. So, while deciding long-term goals, always invest in equity funds early on gain better returns. For instance, as per the value research data, the equity large & midcap has given an annualised return of 15% over 10 years of investments.

Tax-planning

As an investor who is looking for a good tax planning approach to create better wealth, one cannot undermine the tax-saving fund popularly known as Equity Linked Saving Scheme (ELSS). The market experts always suggest that ELSS should be part of everyone’s investment portfolio.  ELSS plans are eligible for tax benefits under section 80C of the Indian Income Tax Act. Further, it also provides the lowest lock-in period of only three years as against other tax-saving schemes.