Mutual Fund for Beginners: How to Choose the Right Equity Fund

Picking the first ever mutual fund can be exciting. It might be your first baby step towards investment; hence investors are always recommended to make an informed decision. Fund houses have a plethora of mutual fund schemes on offer for investors to choose from, but sometimes having too many options may lead to a bit of confusion. Also, if you are someone who is entirely new to investment, you might want to take some investment advice from a financial advisor as to how to go ahead with your first ever mutual fund investment.

A lot of investors may want to make mutual funds a part of their investment strategy but might not know where to start. Picking the right equity mutual fund might involve judging the fund on various parameters, including its past performance, its investment strategy, management history, expense ratio, the risk factor it carries, and so on and so forth. Like all investment avenues, mutual funds also carry a certain risk. They may hold the potential to give you some returns on your investment, but mutual funds do not guarantee any returns.

What are mutual funds?

Mutual funds, like all investment tools, offer investors a chance to earn some returns from their investment. Mutual fund houses collect money from investors and invest that pool of funds in various capital assets. These are professionally managed funds that predominantly invest in equity, debt and money market instruments, etc. Mutual fund investments are exposed to market volatility, and hence returns from mutual fund investments are never guaranteed.

What is an equity mutual fund?

An equity fund is a type of mutual fund that predominantly invests in the stocks of listed companies. As the name suggests, an equity fund invests in the equity market. This type of mutual fund invests in company stocks of different market capitalizations. The growth and performance of a company may impact on the performance of an equity fund which may have invested in that particular company. Before we go further, investors should be aware of the fact that equity investments are exposed to market volatility. Hence, direct/indirect investments made in the equity market are subject to market volatility, and returns are never guaranteed.

Equity fund may be one of the tools which may help investors take a step ahead in reaching their financial goal.

If you are someone who is about to pick their very first equity mutual fund but doesn’t know where to start, here are a few tips which may be of some use:

• Identify your investment goal: The very first question you need to ask yourself is, ‘Why am I investing? What is my investment objective?’ Are you adding mutual funds to your investment portfolio to help build a corpus to secure your child’s overseas education, or are you investing to build a retirement corpus? Or is it for buying a weekend home? Always have a defined investment goal. It may help you in understanding how much investment you need in order to achieve your investment objective.
• Identify your risk appetite: Once you have a defined goal, the next question you must be asking yourself is, ‘What is my risk appetite?’ Are you willing to invest in an equity fund that has a moderately high risk, or you wish to opt for a low risk mutual fund? Identifying their risk appetite may help investors in picking the right equity mutual fund.

• Keep a close tab on the expense ratio: An expense ratio is nothing but the cost of owning a fund and it may have an impact on the returns provided by the Scheme Hence you should also be aware of the expense ratio being charged by the Scheme.

An example to help you understand better - If two funds have expense ratios of 0.50 percent and 1.50 percent, respectively, the fund with a higher expense ratio may reduce the investor’s profitability (however, this may not be true every time). These expense ratio figures may appear minuscule now but may prove to be a big hurdle challenge for your fund’s growth in the future.

• Diversify your mutual fund portfolio: Try and not limit your investment to one type of mutual fund Scheme. As per SEBI’s re-categorization circular, Equity schemes are further subcategorized into different categories. Make sure that you try and maintain a diversified mutual fund portfolio. Diversification may help investors in balancing the risk of their portfolio.

Axis Long Term Equity Fund is a diversified equity linked saving scheme (ELSS) that invests in a mix of large caps and select midcaps. Investing in equity schemes or any mutual funds is not an overnight process. Investments made with a long term objective may be able to help investors in getting a step closer to their investment goal.

Mutual fund investments are subject to market risk. Investors are requested to read the offer document carefully.