Description: Equity funds are one of the most popular choices for investors. But as an investor, what are the factors to consider while choosing an equity fund? Read to know!
If you are looking for long-term returns, investing in the stock market can be the best decision as it offers tremendous potential for wealth creation in the long run. However, although it seems exciting in reality, it is quite a daunting endeavour, especially considering the selection of stocks. But have you heard of equity funds?
It offers a convenient way to take part in the stock market without investing a significant amount of time or extensive knowledge. There are innumerable equity funds available in the market, among which choosing the right one might seem confusing. Here is a complete guide on selecting the right equity funds to ensure the generation of long-term wealth. Are you ready? Let’s start!
What Is An Equity Fund?
An equity fund is commonly known as a stock fund or equity mutual fund, which is a kind of investment fund that pools money. from different investors for investing primarily in equity-related securities or stocks. The entire fund is used by the fund manager for the creation of a diversified portfolio containing stocks whose primary aim is the generation of capital appreciation or income from dividends for the investors.
What Are The Various Types Of Equity Funds?
Acknowledging the various kinds of equity funds is essential to make sound investment decisions. Some of the most common types of equity funds are mentioned below:
- Growth Funds: The aim of growth funds is to invest in companies that entertain the potential for above-average growth in stock prices and earnings.
- Value Funds: The focus of value funds is an investment in stocks that are assumed undervalued by the market. Investors who invest in value funds wait for the market to recognize their appreciation of value.
- Sector Funds: Sector funds aim at investments in specific sectors or industries like healthcare. Technology, financial services, or energy. The goal of these funds is to take advantage of the potential growth of a particular sector.
- Blend Funds: These are commonly known as core funds which mark a combination of growth and value strategies through investment in a mix of value and growth stocks. Investors are provided with a balanced approach as well as significant exposure to value-oriented companies as well as growth-oriented companies.
- Index Funds: These fund aims to imitate the performance of a particular market index. It offers broad market exposure and typically come with lower expense ratios than funds that are actively managed.
How To Choose An Equity Fund?
To make the right choice of equity fund to invest in, there are several key factors that you need to consider. The steps mentioned below will help you to make an informed decision:
Determine Your Tolerance Of Risk As Well As Investment Goals:
Before selecting any equity fund, it is essential to define the objectives of your investment and tolerance of risk. Determine whether you aim for long-term capital appreciation or a consistent dividend income. Moreover, access risk tolerance by considering factors such as your financial obligations, investment timeline, and level of comfort with fluctuations in the market.
Understand The Investment Objective Of The Fund:
Ensure a deep understanding of the investment objective of the fund. Every equity fund comes with a particular investment objective, such as value, growth, and index tracking, among many more. Make sure that your investment goals align with that of the objective of the fund.
Evaluate The Historical Performance Of The Fund:
Research and review regarding the historical performance of the fund over various periods. Compare and contrast the returns with relevant benchmarks and look for consistent returns. Also, compare the fund’s performance with that of its peers.
Research About The Expertise Of The Fund Manager:
The expertise of the fund manager plays a crucial role in the performance of the fund. Therefore research the manager’s experience and investment philosophy as well as track record before investing.
Analyse The Risk Profile And Consider The Expense Ratio:
Evaluate the risk profile of the fund, which involves information on volatility, exposure to various sectors as well as maximum drawdowns of the fund. Take into account the expense ratio of the fund and any inclusion of additional fees such as redemption fees or sales load.
Although these are some of the most significant factors that need special consideration before investing in an equity fund, there are others, including the consideration of fund size and liquidity and going through the reports and prospects of the fund. All these will prove helpful in making your investment worthwhile in the long run.