Tips on Investing Equity Fund Schemes

Equity fund schemes are known for providing capital appreciation over a long term period by investing in equity stocks. Equity fund schemes are suitable for investors looking forward to receive long-term benefits.

There are various Equity fund schemes available in the market. Selecting the ideal scheme may seem like a daunting task. There is need to consider certain factors before investing and follow some tips when investing in equity fund schemes such as:

1. Type of Equity fund

Get to know which type of equity fund it is before you take up the scheme. There are several types of equity funds that serve diverse purposes-

  • Aggressive growth funds- They look for maximum capital appreciation and may use speculative strategies
  • Growth funds- these funds invest in larger, established but growing companies. They generally emphasize capital appreciation
  • Growth and income funds- These funds invest in larger, established companies that offer the potential for capital appreciation but also pay regular dividends
  • Equity-income funds- these invest in dividend-paying stocks
  • Specialty funds-invest in equity stocks of companies fulfilling a certain criteria (such as geographic region, industry sector, social causes, etc.)as mentioned in their objective or offer documents
  • Index funds- Investments are made in the same or similar stocks as the equity market indices, such as the S&P 500
  • Diversified Equity Fund: In this type of fund, investments are diversified across various companies and sectors
  • Small and Mid-Cap Funds: These funds are aggressive in their investment nature and aim to generate long term appreciation. Its portfolio constitutes of equity and equity related securities that invest in companies with relatively small market capitalizations

2. Load to be paid

Check the load percentage to be paid or deducted for the scheme.

Some funds charge a fee at the time of investment (front-end load) and/or at the time of redemption (back-end load). Loads typically range from 1% to 6% of the investment or redemption. In case of back-end loads, the applicable percentage for the load decreases over time. So if you redeem your fund after a span of many years, you have to pay a relatively less load or no load.

In case of some funds schemes, the load varies according to the size of the investment or value of the investor’s account.

3. Operating expense ratio of the fund

Update yourself with the operating expense ratio of your fund.

This ratio represents the percentage of your fund’s capital that is applicable on your scheme for paying the fund’s annual operating expenses such as the fund manager’s salary, trading commissions, office expenses, and marketing fees.

Unlike load, the operating expense ratio is incurred on a continuous basis, as long as the life of the fund exists. Generally, a fund scheme with load charges will have a lower expense ratio than an otherwise identical no-load fund.

4. Volatility of returns

Analyse the volatility of returns of the particular fund.

Volatility is the degree to which the return on an investment in a mutual fund fluctuates. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

The higher the standard deviation, the greater the volatility

5. Past Performance of the fundReview the past performance of the fund to ascertain its strengths and weaknesses.Past performance is a good indicator of how a fund performs under various circumstances. It paints a vivid picture of how the fund is likely to perform in future.Also consider the S&P star ranking of the fund which indicates how a fund has performed in the past relative to peer funds.

6. Find out Fund manager’s tenure

Acquaint yourself with the fund manager’s tenure.

The investor should consider going through the tenure of the fund manager in order to analyse his past performance and compare it with the performance of the fund, while he was handling it.

Also, the fund manager’s portfolio can speak a lot about his performance and reliability quotient.