Equity mutual funds are popularly known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time.
Stocks are often categorized by their market capitalization and can be classified in three basic sizes: - Small, medium, and large. Several mutual funds invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap funds. Equity fund managers employ various styles of stock picking when they make investment decisions for their portfolios. Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other similar companies.
Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole. Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks. Since equity funds invest in stocks, they have the potential to generate more returns. On the other hand they carry greater risks too. Equity funds can be classified into diversified equity funds and sectoral equity funds.
How to Select an Equity Fund
Compare a fund with its peers:
One of the basic fundamental of benchmarking is to calculate funds with in the same category. If you are evaluating the performance of a thematic fund, then you should compare its performance with another similar IT based fund. Comparing it with banking sector fund for example will not give the correct picture. Comparing a fund over stock market cycle will give investors a good idea about how the fund has fared.
Compare returns against those of the benchmark index:
Every fund mentions a benchmark index in the Offer Document. It can be BSE 100, BSE 200, Nifty or any other index. The standard index serves as a guidepost for both the fund manager and the investor. Compare how the fund has fared against the benchmark index over a period of 3-5 years. The funds that have outperformed their standard indices during stock market volatility must be given a close look.
Compare against the fund's own performance:
Apart from comparing a fund with its peers and benchmark index, investors should evaluate its historical performance. By evaluating a fund against its own chronological performance, you can get an idea about consistent performers.