Getting Ready for Your First Equity Fund Investment: 5 Tips

Posted by Raghav Mehera on February 8th, 2018

The mutual funds in India are of many different types. But from all the different types of funds, equity funds are the most popular mostly because of the exceptional returns potential of these funds. But while understanding equity funds is easier than understanding how to pick stocks and directly invest in the stock market, there are still a number of things that every investor should know.

To help you make the right investment decision, we have created a list of five important tips related to the equity funds.

1. Picking the Right Equity Fund

While equity funds are a type of mutual fund, they are further divided into many different types. There are large-cap funds, small-cap funds, mid-cap funds, balanced funds, thematic funds, sectoral funds, and ELSS Funds.

If you are just starting with Equity Fund Investment, it is very important first to understand all the different types of funds to make the right investment decision. While all these funds would invest your money in stocks of companies, the risk profile and functioning of the fund significantly vary.

2. Avoid Short-term Investments

The equity market in India is in a bull phase for more than a year now. A lot of new investors rush to equity funds due to the exceptional returns that the funds were able to generate in the bull phase. But it is important to know that a bull phase is often followed by a bear phase which can easily keep your investment in equity funds in red for a long time.

As a result, equity funds are often recommended for long-term wealth creation, and you too should pick them for the same.

3. SIPs are Great to Beat the Correction

The equity market corrects itself every now and then. If you invest a lump sum amount when the market is already very high, your investment would be stuck in the fund probably for a long time if the market changes its direction. SIPs are a great way to beat such corrections.

With SIPs, you invest a fixed amount in a selected fund of your choice every month irrespective of where the market is. You’ll get more units when the market is down and fewer units as it crawls up. This is known as rupee cost averaging and it eliminates the need to time the market.

4. Do not Overexpose Yourself to a Particular Segment or Sector

There are sectoral or thematic funds which are only allowed to invest in a particular sector or theme. For instance, there are IT sectoral funds, funds for MNCs, oil & gas, banks, and much more. While these funds register exceptional returns when the sector in which they are invested rises continuously, remember that these funds are not allowed to invest in any other segment, theme or sector.

When the sector in which they have invested starts to fall, they cannot switch to any other sector, and you’ll be stuck with the investment.

5. Do Not Panic if the Market Corrects

Equity funds rely solely on the equity markets. As soon as there is a steep correction in the equity markets and the funds start to fall, a lot of new investors end up redeeming their investment and book losses.

Do not let fear make decisions for you and see these corrections as excellent opportunities for long-term wealth creation. A lot of smart investors invest further when the market falls to reduce the average rate of buying units of a particular fund and generate better returns as the market starts recovering.

As compared to other types of funds, equity-based funds can help you achieve your financial objectives faster. While they do come with a certain level of risk like any other type of investment, a bit of prudence can surely help you generate exceptional returns.