11 Factors to Consider When Investing in Equity Mutual Funds

11 Factors to Consider When Investing in Equity Mutual Funds

Indian investors are increasingly favouring mutual funds as a way to invest their resources in order to beat inflation and build wealth. According to AMFI, the total AUM of equity funds including ELSS, was approximately ₹34,000 crore in March 2000. Equity fund AUM reached ₹6,50,000 crore as of March 31, 2020, increasing at a CAGR of 16% over the previous 20 years.

You should consider the following factors while investing in an equity mutual fund.

Factors to Remember When Investing in Equity Mutual Funds

Have a look at the following factors before you choose to invest in equity funds:


  1.     Size of the Fund

The size of a mutual fund is defined by its AUM (Asset Under Management). Although there are no guidelines for an ideal mutual fund size, the performance of the fund may suffer if it is either too large or too little. Analysing it by comparing AUMs with the category average is one approach to do it.


  1.     Track Record of the Fund

When investing in an equity fund, consider how the fund has performed in past, ideally for 4 to 5 years. Compare the fund's performance to that of its peer and the benchmark funds in the same subcategory. Consider investing in funds that have regularly outperformed their benchmark and peer over time.


  1.     Expense Ratio

Expense ratio is the charges incurred by an investor for investing in that mutual fund. A fund charges these expenses as a part of managerial and operational functions. You should consider checking an equity fund’s expense ratio before investing. A high expense ratio can significantly affect your returns. This is also the reason why direct plans give higher returns as there is no intermediary or agent involved.


  1.     Types of Equity Funds & Their Risks

There is more than one subcategory of an equity fund and each has a different risk level. Following are the types of equity mutual funds:

Based on market cap–

Based on investment style-

  •         Value funds
  •         Contra funds

Based on investment strategy-

  •         Thematic funds
  •         Sectoral funds
  •         Focused equity funds

  1.     Taxation of Equity Funds

Your investment in equity funds is taxed as below:

  •         Long-term capital gains

Long term capital gain tax implications are applicable when equity mutual fund shares are held for more than 1 year. If the LTCG amount is less than or equal to ₹1 lakh, there is no tax payable. But if the amount exceeds ₹1 lakh, you will have to pay 10% tax without indexation benefit.

  •         Short-term capital gains

STCG tax is applicable for equity mutual fund units held for less than a year. The tax is levied at 15%.


  1.     Tax Benefits

Under Section 80C of the Income Tax Act of 1961, those investing in ELSS (Equity Linked Savings Schemes) can avail of tax benefits. You are eligible for a tax exemption from your annual taxable income of up to ₹1.5 lakh for each financial year.


  1.     Dividend Payout

The government has eliminated the Dividend Deduction Tax (DDT) in April 2020. However, under a new Section 194K, dividends exceeding ₹5000 are eligible for 10% TDS. This is applicable only to the Dividend option. You will also have to pay tax as per your income tax slab on dividends received. Any TDS deducted u/s 194K can be removed from tax liability on the dividend income.


  1.     Investment Goal

Before you start your investment journey, it's crucial to keep your investment goals in mind. Each equity fund is exclusive with a range of risks, fund composition, and performance. Additionally, each investor is different and has a unique set of financial objectives, investment horizons, and risk tolerance levels. Therefore, it is crucial to find funds that fit your requirements.


  1.     Investment Pattern

You can start investing via lump sum or SIP (Systematic Investment Procedure). Investing via lump sum can be a worry-free procedure if you have the amount at hand. But SIP has its own advantage. It helps in maintaining discipline and manoeuvring market volatility. You can purchase more units for the same price when the market declines. This aids in lowering your average cost for each unit. This process, known as rupee cost averaging, can eventually help you make high returns.


  1.      Risk Appetite

Your risk capacity and risk tolerance will combine to form your risk appetite. When making investing choices, you should take both into account. Your risk capacity will depend on a variety of conditions, such as your age and investing horizon. A person's attitude or outlook toward risk is known as their risk tolerance.


  1.      Difference in Returns

When you are planning to invest in mutual funds, you might hear the term “annualised return” and this might give you a wrong impression. Annualised return does not mean stable return. As mutual funds are linked with market risk, you cannot expect to earn the same return each year. Some years your mutual fund might earn a +10% return whereas the next year might earn a return of -3%. In some years, there might be no return at all. Hence, you should keep this volatility factor in mind while investing in equity funds.

Final Word

The above-mentioned pointers are crucial ones and as a newbie investor, you should consider ticking them before starting your equity fund journey. It will help you navigate the world of investment and guarantee higher returns.

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