Equity mutual funds can be a great way for investors to grow their wealth over the long term. However, not all equity funds are created equal. With hundreds of equity funds to choose from, it can be overwhelming trying to select the right ones for your portfolio. Read on to learn how to navigate the same.
- Focus on long-term growth
The first key tactic is to maintain a long-term mindset. Equity investing is risky in the short term, but historically rewards patient investors over 5–10-year periods. Avoid the mistake of constantly buying and selling funds in reaction to market swings. Have conviction in your investment strategy and stick with quality funds through ups and downs. As legendary investor Warren Buffett put it, “Our favourite holding period is forever.” Adopt a buy and hold approach instead of timing the market.
- Diversify across categories
Don’t put all your eggs in one basket. Diversify your equity mutual fund allocation across market caps and sectors. Consider a mix of large cap, multi cap, mid cap, small cap and sector funds. This provides exposure to companies of all sizes and industries.
- Seek low cost index funds
Equity mutual funds in India carry high expense ratios. The average active large cap fund charges over 2%. These recurring fees eat into long-term gains. To maximise returns, invest a significant portion into low-cost index funds and ETFs which track market indices.
When selecting equity funds, analyse the portfolio of top mutual funds to understand how leading fund managers construct their portfolios.
- Analyse past down markets
Study how prospective funds have fared in previous bear markets like 2008 and 2020. Funds that decline less during downturns can better preserve capital. This helps accelerate recovery when the bull market resumes.
- Ensure adequate mid & small cap exposure
While large caps are safer, mid and small caps generate higher returns over the long run. According to NSDL data, mid cap and small cap indices have outperformed large caps over the past 15 years. Don’t ignore mid and small caps when building your portfolio.
- Monitor performance trends
Review quarterly and annual fund reports to spot any laggards. Consistent underperformance over 2-3 years warrants elimination from your portfolio. Replace lagging funds with better performing peers or index funds.
- Understand your risk appetite
Before investing in equities, have a clear understanding of your risk tolerance. Equity funds carry higher volatility compared to debt funds. If you are conservative, stick to a higher allocation in large cap funds which are more stable. Aggressive investors can opt for higher mid cap and small cap exposure. Choose a mix aligned with your risk appetite.
- Review manager track record
Study the performance of the fund manager over market cycles. The fund manager has the most impact on portfolio returns. Managers with over 10 years of experience successfully navigating ups and downs are ideal.
- Consider flexi/multi cap funds
Flexi cap and multi cap funds provide managers flexibility to invest across market caps based on valuations. This dynamic style helps capitalise on growth opportunities.
- Analyse portfolio concentration
Check portfolio holdings to gauge concentration risk. Overexposure to a few stocks increases vulnerability. Opt for funds with 30-50 stocks representing diverse sectors. A concentrated portfolio can be volatile if top holdings falter. Ensure adequate diversification within the fund’s portfolio.
- Reinvest dividends
Reinvest dividend payouts from equity funds to benefit from the power of compounding. The dividend amount can be used to purchase more units of the fund. This expands holdings and enhances returns. Turn on dividend reinvestment options to boost long term wealth creation.
Conclusion
Equity investing is a powerful tool for long-term wealth creation. By diversifying intelligently, minimising costs, assessing risk and monitoring results, investors can assemble an equity portfolio positioned for success. Maintain discipline, take a long view and let the power of compounding go to work. Embrace these expert mutual fund tactics on your journey to financial freedom.
