Start with the simple

Even if you can afford a fancy car as your first one, it probably makes sense to buy a slightly old second-hand one as your first car. For all kinds of reasons that are self-evident to any sensible person, a second-hand car makes a good 'starter car'.

In a somewhat similar fashion, there are also what one could call 'starter funds'. These are categories of mutual funds that, besides their simple investment characteristics, are especially suitable for investors who are just dipping their toes into mutual fund investing. Moreover, starter funds are actually not just starter funds but simple funds. That is, they are funds that can serve the entire investment purpose of savers who like to keep things simple and do not have the time or the inclination to spend too much time studying investments.

The first type of mutual fund that serves as a good starter fund is tax-saving funds. However, that is purely because of their role as tax-savers. After tax-savers, the first real category of starter funds as well as simple funds is hybrid funds, or as they are more commonly known, balanced funds. The role is simple - investors need a set of characteristics, chief among them being a spread of assets at different points on the risk-return spectrum, asset allocation between them, and asset rebalancing on some defined basis when the asset allocation gets out of whack.

You can do all this manually, so to speak. You can choose a set of debt funds, a set of equity funds and use the tools on Value Research Online Premium to set, monitor and correct your allocation. Or, if you are just starting off, you could try out a type of fund that does it all in one package. This is low-effort, convenient as well as tax-efficient.

Why does this approach work? The two types of financial assets - equity and debt - are not just different but complementary. There are two major ways that an investment can make money. One, by lending money to someone who pays interest on it, be it a business or a government. And two, by becoming a part owner of a business, as in having a share in it. The characteristics of the two are such that combining them is the best approach.

So, the best option would be if one could just pick one or two mutual funds and start SIPs, and the funds themselves would do the balancing, which are hybrid funds. Under SEBI's formal codification of different categories of funds, we now have several categories of hybrid funds that can fit different needs of asset allocation. One of the interesting categories of hybrid funds is dynamic asset allocation, also known as balanced advantage funds. Our cover story of Mutual Fund Insight January 2022 issue is entirely focused on these funds. In recent months, there has been a huge upsurge of investment in these funds, driven mostly by some hugely successful NFOs.

As always, I'm not enthused by this trend. A fund category can be good and great but piling in gigantic sums of money into new funds is not good news. As you will see when you read our cover story of Mutual Fund Insight January 2022 issue, these funds are complex to manage. There are three entirely different vectors whose direction and nature the fund managers have to take a call on. One is the asset allocation, that is, how much to put in equity and debt. The second one is the composition of the debt portfolio and the third is the composition of the equity portfolio. To spell out an obvious challenge, a fund could have a very good equity portfolio and yet have too small an equity exposure than conditions warrant. So, there's a lot that you need to get right and a lot of things to go wrong.

Our analysts have done a deep dive into all these factors and prepared a comprehensive package which will give you a deep understanding of these funds. You need to have a clear view on whether these funds are suitable for your portfolio and if so, which funds are suitable.