People turn to mutual funds to participate in the Indian economy's success story. The addition of a staggering 7 lakh crore to the mutual fund's asset base in 2021 is a testimony. This is a basic and straightforward technique to capitalize on increasing stock prices. However, when it comes to long-term capital appreciation, equity funds in India that primarily invest in company shares are the best option.
Investors may have one concern while investing in equity funds in India: deciding which fund to choose based on their financial objectives. This is because there are multiple products in the market that cater to the various needs of investors. In this post, we will go through the fundamental factors to consider when making mutual fund investments.
What Are the Key Considerations When Investing in Equity Funds?
The following are some of the essential aspects to consider before investing in equity funds in India.
- Investment Goal and Time Horizon
It is crucial to understand your financial objectives before investing in mutual funds. Whether you're saving for retirement or your children's education/marriage, your investments should be aligned with your goals. Similarly, knowing your time horizon will help you choose the best fund. Volatility is common in the equities market, but the rewards are favourable when held for an extended period.
- Risk tolerance and Charges
It is critical to invest in mutual funds as per your risk tolerance. Some equity fund types are more volatile than others. For example, small-cap funds are significantly more volatile than mid and large-cap funds. When choosing equity funds, consider both risk and potential returns, and invest according to your risk tolerance. If you are willing to take on additional risks, you can put more money into mid-and small-cap funds. If you do not want to take unnecessary risks, your portfolio should consist of large-cap stocks.
In addition to your risk tolerance, you should look at the fund management charges, often known as the expense ratio. It is critical to examine the expense ratio and compare it to other funds in the category.
- Type of Equity Funds
There are different types of equity funds in India. Therefore, you must understand the classification and select the option that best matches your financial objectives.
- For Tax Benefit
Tax benefits are available for ELSS investments in India. You can invest in ELSS funds regularly if you understand what is SIP. This allows you to deduct up to Rs. 1.5 lakh from your taxable income under Section 80C of the Income Tax Act.
- Based on Investment Strategy
- Sector funds: You can choose funds based on past and future projections in different sectors. It covers the pharma, IT, Real estate, FMCG, Auto and sectors.
- Theme Based: You can also invest in theme-based funds that include services, export-based, etc.
- Focused Funds: The focus funds are appropriate for those with a high-risk appetite. The fund invests its assets in stocks with higher expected returns.
- Market Cap: You can invest in equity funds based on their market capitalization.
Investing in equities funds in India is an excellent strategy to reach your life goal. However, it is critical to have a long-term perspective when investing in funds and avoid attempting to time the market.