Things To Be Careful While Investing In Equity Funds

Things To Be Careful While Investing In Equity Funds

Investing in equity funds can be an excellent way to build wealth over time. Equity funds are mutual funds that invest in the stock market, providing investors with exposure to various companies and industries. However, like any investment, there are risks associated with equity funds. Hence, as an investor, here are some of the things to be careful while investing in equity funds. Before diving deep into these aspects, you can even go through an overview of what the equity market is, as a refresher.

What is the Equity Market in India?

The equity market in India, also known as the stock market or the share market, is a platform where publicly traded companies can sell their shares to investors. These shares grant investors access to a portion of the company's assets and income as well as ownership in the business.

The Securities and Exchange Board of India (SEBI), the body in charge of regulating the functioning of stock exchanges, intermediaries, and other market participants, oversees the Indian equity market. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two main stock exchanges in India at the moment.

Overall, the Indian stock market offers a venue for firms to raise money as well as for investors to buy stocks and profit from these companies' expansion. However, prior to making any investment decisions, it's crucial to thoroughly consider your investment objectives and risk tolerance as well as to be aware of the hazards associated with investing in the equity market.

Now let’s take a look at some things to be careful while investing in equity funds in India.

Few things to be careful of while investing in equity funds in India

Getting back to our main topic, let’s now take a detailed look at a few things to be careful of while investing in equity funds in India. Considering these factors will help you to make sound investment decisions.

• Understanding the fund's investment objective

Understanding the investment objective of an equity fund is essential before investing. Each fund has a distinct goal for its investments, such as buying stock in large-, mid-, or small-cap companies. Verify that your investing goals and risk tolerance align with the fund's investment objective.

• Evaluating the fund manager

The success of an equity fund is significantly influenced by the way the fund is managed by a professional entity. These professional entities are commonly referred to as fund managers. On behalf of the investors, they are in charge of managing the portfolio. They help in choosing the stocks to invest in and making investment decisions. While putting money into an equity fund, it is vital to evaluate the fund manager's proficiency, track record of success, and investment viewpoint.

• Looking at the fund's past performance

Although historical performance cannot predict future outcomes, it can provide you with a general understanding of how the fund's performance was in the past. Instead of focusing solely on the fund's performance over the previous year, consider its historical performance over a longer period of time, such as five or 10 years. To determine how the fund has done in relation to the market, you may also compare its performance to that of its benchmark index.

• Considering the fund's expense ratio

The yearly charge that the fund levies to cover its running costs is known as the expense ratio. It's crucial to take the expense ratio of the fund into account before investing because a greater expense ratio can reduce your returns. In order to find funds that are more cost-effective, search for those with low expense ratios, ideally around 1%.

• Assessment of the fund's risk

Comparatively speaking, equity funds are riskier than fixed-income funds. Even though equities funds have the potential to offer larger returns, they are also vulnerable to stock market fluctuations, which can result in sizable losses. Make sure the risk level of the fund fits with your tolerance for risk by thinking about it.

• Diversification of your investments

The secret to governing risks in your investment strategy is simply the diversification of your investments. To diversify your portfolio, you should put money into equity funds that make investments in a variety of businesses & industries. To further widen your portfolio, think about making investments in different asset types like commodities, real estate, or fixed-income funds.

• Monitoring your investments

After making an equity fund investment, it's important to regularly monitor your portfolio. Observe the performance of the fund, any revisions to the manager, and any changes to the investment goal. You can make informed decisions and adjust your portfolio as needed with regular monitoring.

• Considering tax implications

Capital gains from equity funds may occur; these are taxed. Make sure you are aware of the tax repercussions of putting money into equity funds and how they will affect your earnings.

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Few conclusions to remember on factors to consider before investing in equity funds

In conclusion, putting money into stock funds may serve as an excellent way to gradually increase your wealth, but you must be careful and weigh all your options before making a decision. While investing in equity funds, it is essential to understand the investment objective, assess the fund manager, examine the fund's past performance, take the ratio of expenses and risk level into account, diversify your portfolio, keep an eye on your investments, and think about the tax implications. Building a strong investment portfolio and achieving your financial objectives are both possible with due diligence and wise decision-making.

Equity Funds Investment FAQS

What is an Equity Fund?

An equity fund in India is a sort of mutual fund which mainly invests in stocks.

What are the benefits of an equity fund?

Equity funds allow you to diversify the portfolio & also gain access to professional fund managers who can help you make informed investment decisions. An additional benefit is that equity funds allow you to start with a small amount.

What are the risks associated with equity funds?

There is a liquidity risk that arises from the possibility that the fund management won't always be enabled to make a sale of your holdings at the right price.