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Oct,18

Picking the Right Equity Fund

Three Risks that can harm your Profits

Wealth creation is not simply about getting the highest returns. High returns come with high risks, however, when the investment fails, the returns decline or even turn into losses. Wealth creation is about getting consistent returns. Proper investment behaviour helps you stay aligned with your goals, so you don’t waver in the face of market upheavals or downturns and consequently the emotional response to that external stimuli. Leaving your emotions aside and staying your course and remaining patient and invested are virtues that will eventually make you create wealth in the longer run.

Equity Funds, by virtue of their nature, invest primarily in equity markets, which provide significant scope for generating inflation-beating returns and wealth creation in the long-term. However, picking the right equity fund is equally important.

Four important factors are mentioned below which need to be carefully considered while deciding upon an equity fund-

1. Selection of fund

2. Past Performance & Fund Manager’s Track Record

3. Expense Ratio

4. Exit Load

1. Selection of fund

Each individual investor is unique in his / her investment decisions. They may be driven by various decisions and motives to choose an equity mutual fund to invest in. For years, mutual fund investors have identified with four broad equity fund categories— large-cap fund, mid-cap fund, large & mid-cap fund and multi-cap. The investors must carefully look into select well-defined parameters and criteria for choosing the best plan which suits them the best. It is always desirable to select a fund which has a major portion of its holdings in quality, well-researched and blue-chip stocks and avoid a fund, which is heavily skewed towards lesser-known or penny stocks.

It also becomes very important to align one’s financial position, decisions, financial objectives and risk appetite with the mutual fund plan that they choose to invest in. First and foremost, decide on the type of fund you would like – whether Value Fund or Growth Fund, and then select the appropriate fund. Once you have arrived at that decision, it is time to pick the one from the peer set. Analyzing data when choosing funds can be helpful but only a few really help you to make a good selection. Figuring out which statistics to use and all too often can be a hard time for many investors. Thus, they make the mistake of leaning too heavily on a fund’s return over the past year.

2. Past performance and Fund Manager’s track record

Consistency in the performance of the equity mutual fund plans gives investors a heads-up on how good a mutual fund plan has performed over a period of time. The previous 1 year, 3 years or 5 years performance of the mutual fund may suggest how consistent or fluctuating has the mutual fund been in the market conditions. It is advisable to check the performance of returns by analyzing the annualized returns over various time periods. You should naturally be more cautious if a fund has a great 10 year record but the manager responsible for such a stellar performance has recently left. If a new manager with a good track record has recently come on board, then a fund with poor or mediocre long term returns may look more promising. Some funds may also have a higher turnover ratio but you need to take a good look at its portfolio. By and large, most investors are better off avoiding high risk funds.

3. Expense Ratio

The Expense Ratio will have a significant impact on the overall returns generated by the fund. Expense ratio is the percentage of assets that go towards yearly expenses such as brokerage fees, agent commissions, fund management fees, administrative costs and other expenses to run the business. It is always better to stick to the peer group and not compare the expense ratio of an index fund with that of an actively managed one, or an equity one with debt. As per prevailing industry standards, an expense ratio of 1.5% is a viable deal. Good performing schemes with high expense ratios may not affect adversely either. However, in the event of bad performance, the same expense ratio may adversely impact the returns.

4. Exit Load

The mutual fund schemes are time bound. In the event of an early withdrawal from the scheme before the maturity period, the investor is required to pay an exit load. Financial needs of individuals are unpredictable and in case of an emergency, one may be required to withdraw from mutual fund schemes prematurely to gain liquidity of assets. It is advisable to avoid schemes with stringent exit loads and choose schemes with minimal exit load to minimize the overall impact on the returns earned.

The given parameters and criteria for choosing the best equity mutual fund schemes to suit ones’ investment decisions and objective may help in selecting the most appropriate schemes to construct a balanced portfolio for achievement of various financial life goals. The well-informed choice of plans of schemes, when aligned with investment objectives, may help gain reasonably good returns over a period of time.

Founded in 2005, ABans Group has grown from being a trading house to a dynamic and diversified business group. We provide expertise in Broking Services, Merchant Banking, Non-Banking Financial Dealings, Gold Refining, Realty and Infrastructure. In a nutshell, Abans Group is a comprehensive Financial Services and Solution Provider, which aims to provide an end-to-end financial solution to all its clients.