Mutual funds can be broadly categorised into seven groups based on the investment objective. As a first-time investor, pick the one that matches your financial goals best
Whenever you want to invest, your first step should be to outline an investment objective. This helps you shortlist the investment instruments best suited for achieving your objective. Mutual funds are pure investment products, and there are thousands of them in the marketplace, suited to every kind of investment objective. So what does the first-time investor choose?
Here are a few persuasions for first-time investors.
Long-term growth with high safety
Debt mutual funds and gilt mutual funds may be your best option if you want slow, steady growth over the long term. Debt funds invest in a mix of fixed-income instruments such as government bonds, corporate deposits, non-convertible debentures, money market instruments, etc. Gilt funds invest in government securities. These provide a high degree of safety for your capital, along with long-term returns that exceed those of bank deposits or small savings schemes.
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Long-term growth with moderate risk
Pick a large-cap fund. These invest 80% and more in large-cap companies, which tend to be stabler compared to their mid and small-cap counterparts. Investing through SIPs in a large-cap fund for the long term can provide high, tax-free returns, in addition to helping you build a diversified portfolio.
Long-term growth with aggressive risks
Small-cap, mid-cap, micro-cap and diversified mutual funds may be the way to go for the adventurous investor ready to take big risks. The long-term returns from these fund categories top all other categories. However, these funds are also very volatile, and you should invest in small, controlled quantities in them.
Combining risk and safety
Hybrid funds help you invest in a diversified mix of equity and debt options. If you are a risk-favouring investor, try an equity-oriented balanced fund that invests 65% or more of its corpus in equity options. If you prefer a much lower degree of risk, you can try monthly income funds which invest 70-90% of the corpus in debt options and the rest in equity.
Index funds mimicking the market indices
Index funds are passively-managed funds. They mimic market indices such as Sensex and Nifty, without the active involvement of a fund manager. The underlying assets tend to be stocks of large-cap companies. Index funds are best used for long-term investing.
ELSS for tax savings
Equity-Linked Saving Schemes (ELSS) are popular among first-time investors. They offer tax deductions under Section 80C of the Income Tax Act. They are diversified equity funds with a three-year lock-in period. They provide tax-free returns.
Undecided & just want to keep the money safe
Liquid funds are your option. These funds invest in short-term money market instruments with a maturity period under 91 days. They are considered highly safe and offer conservative returns matching those of fixed deposits. You redeem the money instantly without paying an exit load.
The writer is CEO, BankBazaar.com