Mutual Fund Investment Tips for Beginners - AxisDirect
Jul 13, 2017 | Source: AxisDirect
Useful, simple to understand and easy to execute. These are the qualities which you should remember while making your first mutual fund investments.
For beginners, these requirements are generally best satisfied by tax-saving funds or balanced funds. Here's why. When you start investing in mutual funds, it makes sense to invest in a fund that invests a majority of its assets in equity. The reason for this is that equity as an asset class has provided the best return among its peers over a longer time frame. Investors at an early stage of their investing life generally have bank deposits, PPF and other fixed-income investments. Hence, it’s advisable to have exposure to equity via Mutual Fund.
It has been observed that equity is the best form of long-term investment and to invest in equity, mutual funds is the easiest and safest way. There are two types of funds that are uniquely suitable as beginners' funds. These are Tax-Saving Funds and Balanced Funds.
Tax Savings Funds: They are all-equity funds, investments in which are eligible for tax exemptions under Section 80C of the Income Tax Act. Under Section 80C, you can get a tax exemption of up to Rs. 1.5 lakh in a set of investments, one of which is ELSS funds. Since ELSS funds are basically equity funds with a lock-in of 3 years, this long – term fund is more likely to provide superior returns as compared to its peer. Because of this lock-in and lower churning, the fund manager has the flexibility to invest in stocks, which are likely to provide better returns.
Balanced Funds: It is also called hybrid funds, combining equity and debt investments in a ratio of say, 60:40. In order to maintain this ratio, the fund manager typically disinvests from holdings that have yielded better returns and parks the money in debt instruments accordingly. This, of course, is asset rebalancing. Effectively, the gains that are made in equity are protected by debt. The advantage of balanced funds is that they are inherently safer than pure equity funds. They gain well when the markets gain however when the markets fall, they fall less sharply, thus protecting the gains that were made in the good times.