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Are you equity mutual fund investment-ready? Here's your checklist

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Equity mutual funds (MFs) have become a popular instrument for investors.

Are you equity mutual fund investment-ready? Here's your checklist
Equity mutual funds (MFs) have become a popular instrument for investors. In equity MFs, the fund managers, based on research, make the decisions about buying and selling. These are known to generate better returns than debt-based funds.
However, not all investors are capable of taking the risks associated with equity MFs.
Here are few factors that can help investors determine if they should invest in equity mutual funds:
Not scared of market volatility
Equity mutual funds have the potential to offer good returns and serve as a wealth building mechanism for all types of investors – be it conservative, moderate as well as aggressive. However, with underlying assets being stocks, returns are highly influenced by market fluctuations and prevailing economic factors, according to Gopal Kavalireddi, Head of research, FYERS.
This means the decision of investing in equity mutual funds should be in sync with this risk factor.
“A 15-25 percent temporary fall once a year is a normal behavior of equities,” explains Arun Kumar, Head of Research at FundsIndia.
“The appropriate allocation to equities can be decided based on the ability to tolerate intermittent declines. Based on the expectation and how much near term decline investors are willing to tolerate, they can roughly decide on the equity allocation. Once they get this mix right, the single decision combined with regular re-balancing will largely determine 80-90 percent of investment outcome,” he adds.
Have investment horizon of at least 5 years
Investment horizon is the duration for which the investor will not need the investment amount for any of the regular expenses. According to experts, investing in equity mutual funds only makes sense if the investment horizon is 5 years or more.
“Mutual funds are linked to market instruments, so volatility, especially in equity should be expected. But remaining invested for a longer term would help investors make actual gains through the power of compounding,” explains Prateek Mehta, Co-Founder, Scripbox.
Volatility will generally be seen in short-run, adds Mehta, but in the long run the accumulation and wealth creation make it meaningful for investors’ financial goals.
Ready to make structured investment
According to Kavalireddi, equity mutual fund investments should be made in a structured manner.
“One should adhere to a well-constructed financial plan. Frequent churning of schemes isn’t advisable,” he warns.
In short, equity mutual funds are optimal investment avenues for investors with long-term goals and financial discipline to build sustainable wealth over a period of time. So, investors willing to keep it structured should only opt for it.
Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
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