Equity funds primarily invest your money into equity shares of different companies. These companies are large-cap, mid-cap and small-cap. The fund manager allocates funds to these companies based on the fund’s investment objective.
Your return on investment depends upon the rise or fall in the prices of these shares in the stock market. Wealth accumulation occurs by way of increase in fund NAV and dividend receipts.
Your long-term capital gains are taxed at a rate of 10%. Equity funds are ideal for long-term investment of >7 years.
Based on Market Capitalisation equity funds can be classified as:
a. Large-cap funds which invest your money into equity shares of large-cap companies. You get stable and sustainable returns over a period of time.
b. Mid-cap funds are those which invest your money into equity shares of mid-cap companies. During a market rally, these funds may give returns above the benchmark. However, during a downturn, the fund might lose more than the benchmark. These funds are ideal for high-risk taking individuals.
c. Small-cap funds invest your money into equity shares of small-cap companies. These are the riskiest of all the equity funds. During a market rally, these funds may give returns above the benchmark. However, during a downturn, the fund might lose more than the benchmark. These funds are ideal for individuals who love extremely high levels of volatility.
Your return on investment ultimately depends upon the selection of the right fund.
For an informed decision making, you may use the following criteria:
It shows average performance of the fund in the given time interval. A time horizon of 3 years & 5 years gives you a realistic idea of fund manager’s ability to invest. These returns are annualized. A 3-year fund return of 25% doesn’t mean that fund gave a return of 25% every year. Instead, it shows average performance over the said period.
Star rating tells you whether the mutual fund is an ideal investment or not. Higher the number of stars, better the fund’s potential. However, Star rating keeps changing every now and then. Consider other criteria as well to select an appropriate fund.
Expense Ratio is an annual recurring fee that your fund house charges for managing your money. It includes fund management fee, agent commissions, registrar fees, and selling and promoting expenses. A lower expense ratio translates into higher take-home returns.
It is a fee charged by the fund house if you leave the scheme before a stipulated period. It is 1% of the NAV prevailing on the date of exit. Exit loads lower your fund returns by the said percentage.
It is the manner in which the fund manager assigns your money to equity, debt, and cash. The proportion of equity:debt: cash varies according to your investment objective of the fund. A long-term risk-seeking fund allocates more to equity compared to debt and cash. A short-term conservative fund allocates more to debt and cash as compared to equity.
It reflects the manner in which the fund manager picks securities. It affects the cost of fund management. Growth style indicates buying expensive securities that have high growth potential.
Value style indicates buying cheaper securities which offer regular dividends. Blend style indicates buying securities that are affordable and have high growth potential. You may choose a fund which suits your investment goals.
Sharpe Ratio refers to the extra return that you earn for holding a risky asset. A fund having Sharpe ratio closer to 1 is good. If it has Sharpe ratio greater than 1, then it’s excellent.
It tells you about how successfully the fund manager has been able to prevent fund returns from falling below the average returns. A fund having Sortino ratio closer to 1 is good. If it has Sortino ratio greater than 1, then it’s excellent.
It tells you about the volatility of the fund as compared to the benchmark. If beta of a fund is more than 1, then it will gain more/lose more than the benchmark during a market rally/recession respectively.
If beta of a fund is less than 1, then it will gain less/lose less than the benchmark during a market rally/recession respectively. You may choose a low-beta fund if you are a conservative investor. Conversely, if you are a high risk-seeker, then go for high beta funds.
It shows the extra returns the fund has generated as compared to the benchmark. A fund having a higher alpha is always better than fund having a lower alpha.
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