Novice Investor | Value Research You do not need a demat account to start investing in mutual funds
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You do not need a demat account to start investing in mutual funds

I am new to investing and want to start investing in mutual funds. I have no understanding of market risk. I don't have a demat account, can I still invest Rs 20,000 a year in mutual funds? Which is the fund that I can invest in for tax benefit?
Arvind Kumar

When you invest in equity mutual funds, you are right away exposed to market risks. As a unit holder, you proportionately own part of the business in which the fund you own has invested in. Market risk is a multidimensional concept that manifests itself in various ways and is reflected in the volatility of the market indicators. Risk is often misunderstood as well, for instance safe investments such as bank deposits too carry risk, there is a risk that the rate you earn will not exceed the rate of inflation.

For a new investor, we suggest you consider investing in a balanced fund. These are funds that have 35 per cent equity exposure which brings in stability to their performance and also insulates the returns from market volatility. Invest in a systematic and regular manner in these funds to get into the habit of investing and experience the performance of your investment in them. You can consider investing in funds such a HDFC Prudence and Reliance Regular Savings Balanced.

As for a tax saving mutual fund, these are equity funds with full equity exposure. Investments in these funds qualify for tax deduction under Section 80C and have a three year lock-in. Some of the good funds in this category to explore are Fidelity Tax Advantage, Canara Robeco Equity Tax Saver and Religare Tax Plan. However, investments in this fund category is open till March 2012, post which the new direct tax code kicks in, doing away with the tax advantage that funds in this category possess.

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