The equity market is nearing its all time high. The tug-o-war between the bulls and bears is an ongoing one. The obvious outcome is the heightened interest of the investors in the equity markets. Despite the volatility in the market and warnings from the gurus in the business, the mutual funds are experiencing good amount of inflows.

Rising tide lifts all ships. In the bull run almost all funds have done well. However as the returns rationalize the weaker hands in the business may not deliver in the future. Hence it makes it even more important to pick up funds that will deliver good risk adjusted returns over the long run.

Before you dabble with the equity funds, do understand the risks involved in it. You must understand that high returns move hand in hand with high risks. Hence if you really need something that delivers with high returns over the long term and you have a higher risk appetite then consider the equity mutual funds.

Once you know that you need an equity mutual fund to reach your financial goals and have the necessary risk taking capacity, go for an equity mutual fund. While choosing an equity mutual fund you can follow a process. Here it goes:

Objective

Define your objective well. Your objective must be in sink with the objective of the mutual fund scheme. Each mutual fund scheme has an objective that is well defined. Do go through the same. If the fund is a sector specific fund, it will mention the same. Typically sector specific funds come with higher risks. You should pick up funds that invest across board. Though for those who understand the sector dynamics, one may consider a sector funds. The ELSS typically is diversified equity schemes.

Entry and exit

If the mutual fund is a closed ended one, it will not allow free exit. In some cases exit is allowed but at the cost of heavy exit load. Please make a note that you are entering a mutual fund to make money and not to pay the fund house. Hence if you can't hold on to an investment, do avoid such closed ended funds. ELSS allows investment with a three-year lock in.

Past performance

Always have a look at the funds performance. While considering the funds performance does look at the performance for at least 5 years period. There are cases where funds deliver extremely well in the short run but fail to maintain the momentum in the long run. Relying on such short stints of a scheme can make you one saddled with bunch of non-performers. Funds that have performed over the long period of time with lower volatility should be preferred.

Portfolio

Do have a look at the portfolio of the mutual fund scheme that you feel is doing well. You need not be an expert in the market to understand the portfolio. You should not look at what is being bought and at what price. Nor one expects you to understand the potential of each stock in the portfolio. You just have to see that the fund is not skewed towards any sector, if it is a diversified equity mutual fund. Also do see to it that the fund is not unduly heavy on one stock.

There are instance where due to over exposure to one sector or one stock, the funds have collapsed. One should not have more than 10% in one stock and 25% in one sector. This should be strictly adhered in case of diversified equity mutual funds. A well-diversified portfolio offers good risk adjusted returns over the long run.

Costs

Nothing comes free in this world. So is the case with mutual fund investments. Each mutual fund investment is subject to entry load and / or exit load. Do check it out. The costs also include the expense ratios of the mutual funds. At a time when the indices are delivering nearly 50% it is a trivial matter to look at expenses. However as the time passes by, if the returns moderate, the expenses will decide your returns. Hence chose funds that come with lower expenses.

These are just some of the important pointers that you must keep in mind. The real taste starts once you have invested in mutual funds. You must offer some time to the fund manager to deliver. However do keep a track of the performance of the fund on quarterly basis.