Don’t be intimidated by the choices on offer; there are options for smooth initiation into investing
As an investor, you face the dilemma of making a choice from the plethora of fund schemes that exist. More often, for someone new to investing, the experience of selecting a fund to start with is too intimidating that they procrastinate than make a decision on choosing a fund scheme to invest in.
To address the needs of the uninitiated, especially those looking to invest in equity funds, there are two variants that could be considered. The equity linked savings scheme (ELSS) or a balanced fund. Both these have all the necessary components which will address a first time investor’s concerns.
ELSS
This fund is a boon for every tax payer, as investments in this fund qualifies for tax deductions under Section 80C up to Rs 1.5 lakh in a financial year. Investments in this fund come with a three year lockin, which is the least among other instruments in which savings and investments qualify for tax deductions. The lock-in instills discipline among new investors to wait before reacting to the performance of the fund scheme to exit. Moreover, on completion of the lock-in, the redeemed sum from this fund is tax free. The combination of equity and tax-saving makes ELSS an ideal gateway to equity.
Balanced funds
As the name suggests, balanced funds maintain a pre-determined ratio between equity and debt assets. Depending on the tilt towards equity or debt, the fund may be termed equity-oriented or debt-oriented. What you need to keep in mind is that the equity-oriented type fund invests at least 65 per cent in equities, while the debt-oriented fund invest about that much in debt assets.
This type of fund scores with the discipline they maintain towards asset balance, which means at a defined frequency, when the equity allocation goes above a band, the fund manager will exit equity proportionately and invest the proceeds into debt to maintain the balance and vice-verse. In this manner, the asset allocation is maintained, which has proved to be the factor to make investing a success.
You have the choice to invest systematically in both these funds, though when investing through a monthly SIP in ELSS, you will need to be cautious of the fact that each SIP instalment will need to stay invested for the three year lock-in, which is not a problem with the balanced funds. Make a beginning, start investing in mutual funds.