3 mutual funds for the first-time investor

For first time mutual fund investors, here are three categories of funds you can start investing in

Kumar Shankar Roy Aug 6, 2019

Heard about mutual funds but unsure which fund to buy? Relax, this is one of the most common challenges faced by all first-time investors. The potential to create wealth by mutual funds is quite understood by newbie investors, but the first step is always the hardest. Instead of buying just any mutual fund, it is important to buy the right fund for beginners. Look, it is very simple. When you start anything, it is important to start with something that is not too complicated. Nobody drives a car in the fifth gear when they switch it on. That concept also holds true for mutual fund investing.

Here at RupeeIQ we believe that new investors like you coming to MF mart should have a positive and good experience. So, here are three types of mutual funds that you can start investing in, along with our specific recommendations. Read on to know more.

ELSS – Save taxes, grow wealth

The first category of mutual funds that you can try your hand at is ELSS, a short form of Equity Linked Savings Scheme. This is basically a tax-saving mutual fund. It allows an individual a deduction from the total income of up to Rs. 1.5 lakh under Sec 80C of Income Tax Act 1961. So, you can invest up to Rs 1.5 lakh per year in ELSS and get the investment deducted from your gross income, hence your taxable income will go down by that extent. This category of funds is suitable for people who have taxable income and want to save on taxes by investing in these funds.

Let us assume you can invest Rs 1,000 per month in ELSS and so you invest Rs 12,000 a year. Then, this amount would be deducted from the total taxable income, thus reducing your tax burden. Don’t worry if you can’t invest a lot. There are ELSS plans that allow you to invest low sums of Rs 100-500 per month.

The tax-saving mutual fund is like two-in-one icecream. On one side, you save taxes. On the other hand, the money invested in ELSS grows your wealth. Even if you invest small amounts, if you do it over a long period of time, the money can grow quite big. Historical evidence shows that over 20 years, you can get 6 times of your investment. We are not making any predictions, but those are kind of indicative returns. A comparable bank Fixed Deposit (FD) would just about give you 2 times multiple. Tax-saving MFs have a lock-in period of three years from the date of units allotment. After the lock-in period is over, the units are free to be sold.

Tip: Always invest in ELSS/tax-saving funds through the SIP route, i.e. Systematic Investment Plan which allow you to invest a fixed sum every month.

Top ELSS funds

ELSS 1 yr return 3 yr return 5 yr return
ICICI Prudential Long Term Equity Fund -4.84 % 6.53 % 8.82 %
Franklin India Taxshield Fund -5.97 % 4.79 % 9.75 %
HDFC Taxsaver Fund -7.83 % 5.93 % 6.34 %
Tata India Tax Savings Fund -2.09 % 8.32 % N/A
(as on Aug. 5, 2019)
Source: RupeeIQ Mutual Fund Tracker

Additional read: Even worst performing ELSS funds beat PPF returns by a wide margin

Index fund – Low cost investing

Did we lose you at the mention of ‘index’? Okay, let us explain it another way. There are times when you take a Uber/Ola normal ride and there are times when you take the pool option. Why do you ride in a cab full of strangers? It saves on cost – yes. The journey is nothing special – yes. You are alone and don’t mind going there with some other people – yes. Index funds are like the ‘pool’ option in the MF world.

Index funds are low-cost funds. They are not managed by fancy fund managers. This type of mutual fund actually tracks the Sensex or the Nifty. Yes, these funds copy the movement of the Sensex or the Nifty. That’s all they do, most of the times. So, the mutual fund company charges you a lot less. Index funds are like the no-frills option.

If you are starting new in the mutual fund investing space, invest money in index funds. Your costs will be quite low. Plus, you will get returns that closely mirror the Sensex and the Nifty benchmarks. Index funds are like entry-level cars; they deliver returns in your budget. Do not be afraid to try out when you choose your first investment. Index funds will have the word ‘index’, ‘sensex’ or ‘nifty’ in their names.

Unlike ELSS, index funds do not have any lock-in period. They have historically proven to be fair creators of wealth. We do not know what exactly will happen in the future, but the Indian economy and the biggest companies can be expected to grow fairly well. So, invest money in index funds.

Tip – Choose index funds with long track records and a fair amount of investor assets. This will ensure your money is in good and trust-worthy hands. And, always SIP it!

Top index funds

Index funds 1 yr return 3 yr return 5 yr return
UTI Nifty Index Fund -2.11 % 9.24 % 8.22 %
HDFC Index Fund – Sensex Plan -0.15 % 10.82 % 8.64 %
ICICI Prudential Nifty Index Fund -2.28 % 8.93 % 8.06 %
(as on Aug. 5, 2019) Souce: RupeeIQ Mutual Fund Tracker

Additional read: What are index funds? It’s time to make a small allocation

Dynamic asset allocation – Hands free investing

Have you tried bluetooth earphones or speakers? Yes, the ones that have no wires? Those are convenient because you do not need to worry about the tangly wires that are usually attached to the wired earphone or speakers. In the mutual fund world, there is a fund that practices this hands-free approach. But, first why you need this fund.

Whatever we say or believe, the truth is that nobody knows how markets will perform in the short term. We do not know how the stock market will behave. Will gold continue to do well next year? Is your money better placed in fixed income assets? Dynamic asset allocation funds make all these questions redundant for the investor. You do not need to worry about all this at all. The fund manager of the dynamic asset allocation fund is entrusted with this complicated responsibility.

Dynamic asset allocation funds invest in a mix of debt and equity assets. The funds increase/reduce their allocation to equities/stocks and debt/fixed income depending on their view of the stock markets. In this way, your money keeps on getting re-arranged in a way that will suit you best. As a new investor, you don’t know how asset classes will perform. Even, seasoned investors cannot predict this with a fair degree of certainty. So, delegate this tough job to the dynamic asset allocation fund.

Invest your money, again in the SIP way, and let the dynamic asset allocation fund work for you. That’s the best way to manage money between different assets – let an expert handle it.

Tip – There are some very trusted dynamic asset funds that work based on intricate models. Their historical track record shows that these funds are fairly right about when to move into one asset, and when to lower exposure to another.

Top dynamic asset allocation funds

Dynamic asset allocation funds 1 yr return 3 yr return 5 yr return
ICICI Prudential Balanced Advantage Fund 3.07 % 7.10 % 9.12 %
Aditya Birla Sun Life Balanced Advantage Fund 1.44 % 6.50 % 8.28 %
Reliance Balanced Advantage Fund 2.28 % 8.43 % 8.78 %
Edelweiss Balanced Advantage Fund -3.61 % 6.10 % 7.31 %
(as on Aug. 5, 2019): RupeeIQ Mutual Fund Tracker

Additional read: ‘Alpha in dynamic asset allocation fund category typically comes when the market is in consolidation mode’

Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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