Your first equity investment!

If you are planning to invest and see your wealth grow, equity is the best option. Yes, you are right in thinking that equity is volatile and goes up and down daily, but that's just half the story. If you look at the historical data, equity has been able to beat inflation in the long-term. 'Long-term' is the key word here.

In fact, equity is the only asset class that can generate inflation-beating returns. This is why one should invest in equities. If you want to know the importance of earning returns that are higher than inflation, this is a must read for you.

So, how does one start investing in equities?

Option #1: Direct stocks

While terms like trading, BSE, bulls, Sensex, etc., are seductive, this form of investing should be ignored by beginners. Direct stocks can be very overwhelming if you are new to investing. You need to know what stocks to buy, when to buy, when to sell, etc...too many things to learn at the beginning.

Option #2: Mutual funds

So, what is a mutual fund? This type of investment simplifies the task of investing in equities.

Why? Because they reduce your risk by diversifying your portfolio. Secondly, every mutual fund has an expert who will manage your money on your behalf and ensure you receive healthy returns. This is why it is highly desirable to start your equity investment with mutual funds.

How to start mutual fund investment
A first-time investor should look out for low-risk schemes that provide a decent amount of return. Only once you get a taste for mutual fund investing should you explore other investments. Sounds boring but it is always better to walk before you run.

Hence, there are two specific types of mutual funds that are suitable for a beginner.

#1 Aggressive hybrid funds

These funds invest about 65 per cent in equities and 35 per cent in debt. Debt instruments include bonds that are issued by a government or a company. They earn a fixed income and don't depend on the stock market performance.

Therefore, this is how aggressive hybrid funds help in containing the equity volatility and are better-placed to provide more consistent returns as compared to pure equity funds.

Why is this good for you? Softening the risk is what is necessary for new investors so that you are psychologically strong to stay the course and do not end up exiting the fund in panic.

#2 Tax-saving funds

Also known as equity-linked savings scheme or ELSS, this type of mutual fund in India majorly invests in relatively-safer large-cap stocks.

Why are these funds good for you?

These funds help you save tax. Under Section 80C of the Income Tax Act, you can claim a tax deduction of up to Rs 1.5 lakh in a financial year.

One caveat of this scheme is that there is a lock-in period of three years. This means that once invested, you can only take your money out after three years. However, this works as an advantage for new investors who can't handle the market volatility and also helps one have a long-term view which is the holy grail of equity investing.

To know how mutual funds work in greater detail, visit Get Started, our specially curated page for new investors like you.

This article was originally published on July 26, 2022, and last updated on November 16, 2022.