First-time investors are often confused by the plethora of fund choices available. Here is some help.
10-Feb-2022 •Research Desk
Useful, simple to understand and easy to execute, these should be the qualities that your first fund investments should have.
For beginners, these requirements are generally best satisfied by tax-saving funds (if needed) or aggressive hybrid funds. Here's why. When you start investing in mutual funds, it makes sense to invest in a fund that invests mostly in equity. This is because you are likely to have no equity investments at all. Investors at an early stage of their investing life generally have bank deposits, PPF and other fixed-income investments. Since equity is the best form of long-term investment, and mutual funds the easiest and safest way to invest in equity, it follows that the type of fund you choose must be an equity fund. There are two types of funds that are uniquely suitable as beginners' funds. These are Tax-Saving Funds and Aggressive Hybrid Funds.
Tax Savings Funds: Tax-saving funds are also called ELSS funds as their formal name in the tax law is Equity-Linked Savings Scheme. They are basically all-equity funds, which are eligible for tax exemptions under Section 80C of the Income Tax Act. Under Section 80C, you can invest up to Rs 1.5 lakh in a set of investments, one of which is ELSS funds. Since they are equity funds, one should invest in them for the long term. This long-term imperative is compulsorily enforced because under the tax laws, investments made into these funds are locked in for at least three years. Because of this lock-in, investors tend to have a good experience of getting reasonable returns from these funds. Moreover, the tax break acts as a natural boost to returns.
Aggressive Hybrid Funds: Aggressive hybrid funds combine equity and debt with a typical asset allocation of 65:35 between the two. Debt as an asset class is not dependent on stock market performance and is not volatile. Therefore, a great advantage of these funds is that it controls the equity volatility to some extent. They gain well when the markets go up, but when the markets crumble, they fall less sharply than a pure equity fund. Aggressive hybrid funds are therefore suitable for first-time investors. It plays an important psychological role to help you stay the course and not exit the fund in panic, which is the most crucial bit at the start.