As markets make a new high due to the UP election results there is a sense of euphoria and also a sense of déjà vu. Once bitten twice shy! This goes for a lot of first time and pro risk investors, who started investing in equity mutual funds at the peak of the market in late 2007 or early 2008. Within a year, as stock markets fell, their investments were reduced to half or even less.
Timing the market and chasing the hot theme is perhaps simplest thing to do because when the markets are on a rise as no one would like to miss out as even the neighbours and novice investors are entering and making a killing in the market. So what should first-time investors do follow them and try to make a quick buck!
What should be your first mutual fund investment? The answer is different for different investors and depends on their age, financial goals, risk-taking capacity, time horizon etc.
Let’s discuss some fund categories which can be good options for the first-time investor
BALANCED FUNDS: These are hybrid funds which invest in both equity and debt. The equity and debt portions are diversified (in terms of sectors and companies) to avoid concentration of risk. Balanced funds are a good starting point for most first-time investors because of the pre-defined equity-debt mix.
LARGE-CAP FUNDS: A diversified portfolio of top 50-100 companies in terms of market capitalization makes them safer for first-time investors. Large-cap schemes usually invest 80 percent or more funds in large companies. This gives stability as stocks of large companies are usually less volatile than that of mid- and small-cap companies. The upside potential of these funds is lower too.
INDEX FUNDS: These funds are passively managed, which means fund managers do not take any call to increase or decrease holdings. So, there is no fund manager risk. Most index funds track either the Nifty or the Sensex and hence by default are large-cap, diversified funds.
MID AND SMALL CAP FUNDS: These funds invest in a mix of small and mid-cap companies. These funds are positioned on a higher risk-return tradeoff compared to a large cap fund. These are suitable for seasoned and pro risk investors.
TAX-SAVING FUNDS: Also known as equity-linked saving schemes (ELSS), these are the favourites of most retail investors. The reason is that the investment is eligible for tax deduction under Section 80C of the Income Tax Act. These are diversified equity funds with a three-year lock-in and are the first choice of many first-time mutual fund investors.
“More often than not, these funds are chosen to just save tax. Given the three-year lock-in, any non-performance by the scheme can badly hurt first-time investors, who may develop a negative bias for the entire product category.
MONTHLY INCOME PLANS (MIPs): MIPs can be a good option for someone looking to park a part of his/her retirement corpus. MIPs are hybrid schemes with 80-85 per cent funds in debt and 15-20 per cent in equity. Equity helps generate returns higher than what a bank FD gives, but makes the portfolio risky.
The choice of your first mutual fund scheme depends on your investment horizon, existing portfolio and financial goals. Therefore, take a call after assessing your needs. At Equest Capital we follow valuation based advice and our top priority is RETURN OF CAPITAL AND NOT JUST RETURN ON CAPITAL. Join our circle and get a head start on your investments.
For more details on this, you can drop an email on info@equestcapital.com