Investing in equity funds is considered one of the best ways to help build a corpus in the long term. Though the investing process is quite simple, there are still a few pointers that the trader needs to pay attention to before starting the investment journey.
Clarify your Investment Goals
The thing to do before investing not only in equity funds but in the financial market is to keep your financial and investment goals in mind. Every fund and investor is diverse, so by keeping all the factors clarified and checked, unnecessary hardships can be avoided.
Your goal can be anything from tax reduction to a good saving scheme for the future. But this clarification forges the path for future investment by giving you an estimate of the time and ability of risk-taking.
Keep Timing Factor In Mind
A clarified goal will give you the amount of time available to let your funds grow. This will help in the process of the selection of funds. Classify your time risk into short, mid, or extended duration and choose wisely.
You can go for liquid funds for a short duration, ultra-short duration funds, which last for up to three years; if your time goal is mid-duration, then you can go for short duration funds or balanced advantage funds, which generally lasts for three to five years. And lastly, for a long duration, you can go for large-cap funds or Multicap funds with a return period of more than five years.
Understand Your Risk – Taking Capability
Your risk level, commonly known as risk appetite, depends on many factors such as financial conditions, age, needs, and much more. If you are in some debt, your risk appetite would understandably be below, while if you are a student with not much to lose, your risk appetite may be high.
By analyzing your risk appetite, you can choose the funds that best meet your needs. There are many low-risk funds available, like short-duration funds or large-cap funds. Similarly, there are funds with medium risk levels, including balanced advantage funds or Multicap funds. And if your financial condition is stable, then with thorough research, you can go for arbitrage funds or equity hybrid funds with a higher risk level.
Assess The Size – AuM Of The Fund
AuM, which is Assets under Management, is the number of subscriptions a fund receives from investors. A fund with significant AuM’s indicates that many people have shown confidence in that fund. Funds with large asset sizes are also beneficial when liquidity is concerned.
On the other hand, smaller AuM’s are made out to be new funds. Although they sound unfavorable to significant AuM’s, they come in handy when you have to move around the market.
Understand Different Types Of Funds
Apart from the size factor, it can also be classified into different types of equity funds, based on various criteria. These classifications, if understood, can provide much-needed clarity of the market to the investor.
Market Cap Funds – these funds are based on market capitalization, which is the total market value of the company’s share of stocks. Funds based on the market cap are small-cap, medium-cap, large-cap, Multicap, etc.
Thematic Funds – these funds invest in the stocks that are tied to a theme. They pick companies that are based on a particular idea.
Sectoral Funds – these funds invest in specific sectors prevalent in the market. For example, it can be IT-based, Agriculture based, Pharmaceutical Based, or anything else.
Region-Based Funds – These funds invest in securities that are either based on global or domestic markets.
Value Funds – these are the funds that mainly invest in undervalued stocks.
Contra Funds – these funds invest in those stocks that are not performing very well.
Focused Equity Funds – These funds only invest in a fixed number of stocks. As per SEBI guidelines, these funds can only invest in a maximum of 30 stocks of varied market caps.
ELSS or Equity Linked Saving Schemes are the equity mutual funds that help offer tax benefits under Section 80C of the Income Tax Act, 1961. Under this, the traders have an option to avail of the tax exemption up to Rs. 1.5 lakh per year (financial year) from the annual taxable income.
Taxation of capital gains:
Once you have decided to invest in the equity funds, it is time to know how to invest in the equity funds. As an investor, there are many ways to invest. In this era of technology, you can buy these funds from the fund houses or purchase them from distributors or financial planners, or banks.
At last, it is essential to remember that investing in equity mutual funds is all about the time to read it and the discipline. Once you can master these factors, equity funds can help you tide over any financial blues that come your way shortly.
This content was originally published here.