In August 2023, equity mutual fund inflows in India surged to an impressive ₹20,245 crore. This robust growth reflects the increasing interest of Indian investors in equity mutual fund investments to grow their wealth over time. An investment journey should begin with a clear understanding of risk tolerance, investment objectives, and a fund’s liquidity. The same is true in the case of equity funds. Equities tend to be more volatile than debt assets. Hence, periodic analysis is important. Read on to learn more about equity mutual funds and how to analyze them.

Analyzing equity funds: a six-point guide to selecting the best equity mutual funds

1. Investors should analyze a fund’s progression over multiple market cycles

Investors should look beyond a fund’s recent performance and consider how it has fared over various market cycles. Equity markets can be volatile, and a fund’s ability to weather different economic conditions and generate returns is a significant indicator of its potential. This long-term perspective can help investors assess the fund’s resilience and suitability for their investment goals.

2. They must check the fund’s expense ratio before investing

The expense ratio represents the costs of managing the fund, including management fees and administrative expenses. It is expressed as a percentage, and the investor charges it according to the invested amount. Lower expense ratios translate to higher returns in the investor’s pocket. Therefore, investors could choose funds with lower expense ratios, as they can impact their overall returns over time.

3. They should understand the taxation of their investments

The Income Tax Department levies capital gains tax on equity mutual funds depending on their holding period. Long-term capital gains tax on equity investments held for over a year is 10%. Profit up to Rs.1 lakh is tax-exempt after three years of investment. Short-term capital gains tax on assets held for less than a year is 15% plus applicable cess. Understanding the taxation rules and planning one’s investments accordingly can help investors understand their post-tax returns.

4. Investors must choose the type of fund – direct or regular

Investors can invest in mutual funds through a direct or regular plan. Direct plans have lower expense ratios, as they do not involve intermediaries, which can translate into higher returns over the long term. However, regular plans may provide advisory services. When choosing between these two options, investors must consider their ability and willingness to make investment decisions independently or with the assistance of a financial advisor.

5. They must check the liquidity offered by an equity fund

Liquidity is a critical factor, especially if an investor might need to access their investment in the short term. Equity funds typically provide high liquidity, but some may have lock-in periods or exit loads. Investors must be comfortable with the fund’s liquidity terms before investing.

6. They must learn about the fund’s manager and their investment approach:

Investors should research the manager’s track record, investment approach, and the performance of the previous funds they have managed. They should ensure the manager’s investment approach suits their investment goals and risk appetite.

Using the above pointers to analyze mutual funds could help you make the most out of your investment. Further, mutual fund calculators help investors determine the potential returns on their investments based on factors like their investment amount, tenure, and expected rate of return. By inputting different scenarios, investors can make informed decisions about the amount they should invest and the tenure that best aligns with their financial goals.