When investing in equity funds, you should understand your risk appetite and investment horizon. Such funds are ideal for an investor with an investment of five years or more. Hence, short-term investors should avoid investing in mutual equity funds.
Equity mutual funds mainly invest in the company’s equity shares. According to the Securities and Exchange Board of India (SEBI), if a fund invests 65% or more in its equity portfolio, it is classified as an equity-oriented fund.
If you want to save taxes, you can invest in ELSS, it is considered the best option under Section 80C of the Income Tax Act of 1961. The ELSS has the shortest duration of three years. It provides significantly higher returns than other investments protected by Section 80C.
A prospective mutual fund shareholder may choose to invest in large cap-equity funds because these funds invest in equity shares of well-established companies that have a long-term record of producing steady returns. On the other hand, an experienced investor may choose to invest in a diversified equity fund to achieve the best balance of risk and return.
At least 65% of their portfolio is invested in stocks by equity mutual funds. Actively / passively controlling equity funds (index funds). The best equity mutual funds offer a medium to long term with high returns.
They are generally considered risky because they invest heavily in stocks. The price of the fund may fluctuate continuously. Because of this, conservative investors choose only the best equity mutual funds.
While choosing an investment, since equity funds are risky bets, you need to examine various parameters.
You should consider these things as an investor
Fund goal: The best equity mutual funds aim to accumulate wealth through a balanced investment strategy. The selection of shares is based on the investment style, which can be an investment in investment value or growth. Investing in value means acquiring undervalued shares, which will increase in value, ultimately leading to profit.
Type of fund: In addition, equity funds are classified into purely large / mid-cap / small-cap funds. Small-cap and mid-cap funds are more likely to have high-risk returns than large-cap mutual funds. Then there are multi-cap funds that invest in a highly diversified portfolio through various capitalizations.
The risk: Equity funds face the greatest risk, known as market risk. Equity funds are affected by indices like Nifty or Sensex. The overall rise and fall in the index contribute to the volatility in the value of equity funds. This volatility is higher than debt funds or money market funds.
Cost: To manage the portfolio, equity funds pay an expense ratio. SEBI has set an upper expense ratio of 1.05 percent. Actively managed equity funds have higher expense ratios than index funds.
Investment: Equity funds are good for long-term investment horizon individuals. The fund typically experiences very low moving volatility. This long period of ups and downs is spread over five years.
Hence the fund can give returns in the range of 10% -12%. Those who select the best equity mutual funds must be prepared to hold on to their full potential for at least the said duration.
Financial destination: Investing in mutual funds is perfect for achieving long-term financial goals such as building wealth and planning retirement. Being a high-risk high-return paradise, these funds will create enough capital that can help you retire early and follow your life-long passion.
Inflation-beating returns: Historically, equity fund schemes have been able to generate market-beating and inflation-beating returns, among all other investments. Most secured investments, such as fixed deposits, recurring deposits, etc., offer an interest rate that, after accounting for inflation, offers no growth in the value of money.
Diversified Portfolio: Investment in equity mutual fund schemes ensures that shareholders can hold a large number of shares of different companies and through various business structures, disciplines, industries, etc. Having a wide range of stocks in one’s portfolio means that there are no major one’s losses occur that cannot be offset by gains in any other segment of the funds.
Capital appreciation: Equity mutual fund scheme is the only real option for those who want to invest their capital for medium to long term and expand as one of the few financial products that provide real market and inflation-beating returns.
Tax Benefits: Equity Linked Saving Schemes or ELSS as it is commonly called, can save up to Rs 1, 50,000 annually from taxable income by investing in this route. ELSS is also the only tax saving investment under Section 80C that has received such high historical returns — no other Section 80C was able to match the profits produced by mutual funds.
Expert Management: Many equity mutual fund schemes are operated by professional fund managers with the advice of market analysts. Live monitoring of investment options and possibilities for investment facilitates risk mitigation and makes it clear which options to invest in.
Liquidity: Stocks and bonds are traded daily in the world’s major exchanges. Although not immediately liquid after withdrawing funds from a savings bank account, the proposed liquidity is higher than most other mutual fund schemes or investment schemes.