The Challenges Of Investing Through An Equity Fund

An equity fund is something like a mutual fund that simply invests in stocks. It is run by professionals and very convenient, but here are some limitations it could pose.

When it comes to investing in the stock market, there are different routes to take. Primarily, you can choose to invest by yourself by analyzing financial data and garnering as much information as you can about the stocks you want to invest in, the industries they’re in and the relevant strategies to put in place to ensure that your investment objectives are met.

However, there is also the option of investing through an equity fund.

An equity fund is something like a mutual fund that simply invests in stocks. These funds, just like regular mutual funds are run and managed by professionals who have the right expertise towards ensuring that all fund shareholders attain the objective for their investment be it growth or value increase or just getting the best amount of dividends in the market.

They worry about all of the things you should ordinarily worry about like portfolio diversification, hedging, and so on. In essence, rather than limiting your investment success to your knowledge and ability to always make the right decisions, you cede the responsibility to somebody else.

While this is an amazing option especially because it gives you optimal returns, causes minimal stress as you can be relatively passive with your investments and frees you up from making emotional decisions based on fear or greed, there are a couple of unpronounced downsides with giving all that power to somebody else.

Now, it is important to note that neither method is better than the other. What matters is your understanding of both methods, their advantages, as well as their inherent limitations.

As a way to guide the investor, here are some of the downsides that come with investing using equity funds.

Usually Not Short Term

While this is not much of a problem for the long term focused investor, for others it could be a challenge. When investing on your own, it okay and advisable to invest for the long term.

However, while it is also advisable to hang on for the long term with an equity fund so as to attain the full objective of your investment, staying in partnership and consistently paying management fees to an equity fund manager might be a different level of human and financial stress.

Equity funds are usually not investment options for short term and this is because the returns are very volatile for short period.

Gives Investor No Or Less Control Over Investments

Here, the investor has no control over his/her investments as all the decisions are taken by the fund manager. Sometimes it’s, great. Other times, however, it could lead to a series of disputes as somebody is essentially telling you how best to invest your money.

Higher Costs

Of course, none of the benefits you enjoy are free. Since the funds are professionally managed they entail higher costs. That is, for example, all personnel hired to render professional managements over the investment period are paid regularly. This cost could be cumbersome in the long term.

Choice Overload

There are probably over 500 schemes of Equity Mutual Funds to choose from, with an array of objectives. Trying to determine the right kind of equity fund for you to put your money in is almost as hard as having to build your own investment portfolio from scratch.

Before proceeding to invest in an equity fund, it is important to speak to your investment advisor before concluding over you’re the fund. At the very least, it is pertinent that you weigh the pros and cons against your investment objectives.

Written by Lawretta Egba.