Factors to choose right diversified equity fund

For first time investors choosing the right mutual fund, the scheme can get a little tricky. That’s because right now there are thousands of mutual fund schemes to choose from. Not just that, the investment objective of certain schemes are so similar investors may feel that they are the same. However, this is not at all true as every investment scheme is unique and has a different investment strategy, asset allocation strategy, investment objective, benchmark, etc. To ensure that one can create long term wealth with their investments, mutual fund investors must ensure that they invest in a mutual fund scheme that offers the necessary diversification.

If you are planning on adding equity mutual funds to your investment portfolio, here are some of the things you should take into consideration before investing:

Ensure that your investment objective aligns with that of the scheme

If you want to make sure that the equity fund in which you are planning on investing has the potential to help you target your financial goals, then your investment objective must remain in sync with that scheme. For example, if your investment objective is to only generate long term capital appreciation by investing in an equity fund that invests in financially well-established companies then any scheme other than a bluechip fund or a large cap fund is ineligible for your investment goals.

Compare the historic returns of the equity scheme with its peers

When choosing a diversified equity mutual fund scheme, it is essential to compare its past performance with its peers so that it becomes easy to set benchmarks. So if you are looking for a tax saver fund like ELSS (Equity Linked Savings Scheme), you must take a look at the past performance of all the other tax saving equity schemes as well. In such a scenario, it won’t make any sense to compare an ELSS fund with a small cap fund’s performance. When checking the past performance investors must make sure that they select the right time frame. If you want to check the past 5 years’ performance of an ELSS fund then you should compare it with the past 5 year performance of other mutual fund schemes.

Check the diversified equity fund’s performance against its underlying benchmark

You must be aware that every mutual fund scheme has an underlying benchmark which it aims to outperform in the long run. The investor must check how many times the equity mutual fund has managed to outperform its benchmark in the past. The past performance of an equity mutual fund scheme cannot determine its present or future performance. However, a scheme that has consistently delivered and outperformed its benchmark speaks volumes of the fund management handling the scheme. It is important to consider an equity scheme that has credible and expert fund management.

Make the most out of the online SIP calculator

If the equity mutual fund scheme in which you are planning to invest has delivered average annual returns of 12% in the past, you can find out how much you can potentially earn with these returns in the future. By using an online SIP calculator, investors can determine the total returns (approximate) which one can earn from investing in the equity scheme in the future.

For example, if you want to find out how much wealth you can create by investing Rs. 10,000 per month for three years in an equity mutual fund that has an average of 10% rate of returns, you can do so by using the online SIP calculator.