It’s a challenge choosing the right mutual fund because of a lot of choices available. Sometimes it makes one confused and indecisive. There is a wide range of options available for you. You need to have a well-thought-out approach to arrive at a sound decision and also to avoid the wrong choices. Equity Mutual Fund in India is quite popular among particular segments of the populace who want both growth and safety. You should be able to understand the different types of schemes available to you. Equity mutual fund returns in India varies due to this same reason the quantum of return is variable. Many factors govern the return.
Assets of equity funds are invested in the shares of companies in different sectors. The fund manager tries to spread your investment across sectors. The returns from equity funds are better than those of term-deposits or debt funds. You will find investment in these funds a bit risky because it depends on the market. You cannot depend on historical returns because many a time the predictions go wrong. The mutual fund schemes are unable to provide historical absolute returns in terms of percentage. Absolute returns are something we should depend on for estimating our gains. It has been seen that many mutual fund schemes could not provide absolute returns for a long time. One cannot predict the future based on the past because the present is quite turbulent sometimes. Despite this observation, you need to have some firm expectation on returns. To guess the returns, you have to understand the following:
Returns from the fund = GDP growth rate + inflation + P/E expansion delta + market risk premium + Alpha of fund manager
The GDP growth and inflation are the basics of growth of the market. It’s because the market depends on the economy of the country. The benchmark or P/E fixes the returns. The inflation is anybody’s guess because it’s unpredictable. As long as the prices of crude oil in the international market are down, the inflation may be under control. So, a country depends on the imports of oil to calculate inflation. Monsoon is another consideration in India. During poor rains caused by poor monsoon, the market will witness a scarcity in the agricultural produce. It will affect inflation adversely. A high rate of inflation causes a fall in returns from the mutual funds.
You should assess your risk appetite and experience in the financial market. Most conservative investors will try large-cap funds. The returns from these funds are relatively low but your investment is more or less safe. You should diversify your investment. If you have invested in the right mutual fund with a good fund manager with considerable experience, you may expect to have your money safe. You can count on a healthy rate of return in future. If you have a moderate risk profile, you should select multi-cap funds. In this fund, your investment is evenly distributed curtailing the risks.