Mutual Funds are best route for new investors

 

In India, an investor interested in equities has the option to invest directly in the stock market. Logically, such a move is a complete mis-step for someone who has no prior experience of dealing with the daily volatility in prices of stocks, the short-term uncertainty with returns and the overall higher risks that stocks carry.

Instead, financial planners and advisors say, the best route for first-time investor should be to take the mutual fund route. In a mutual fund, the fund manager could become the investor's de-facto navigator and controller during the formative years. The logic here is that first-time investors should first be exposed to low-risk, low-volatility investments that are linked to the stock market. Then, over time, they should be graduated to products that carry with them higher risks.

A first-time investor in equities should never put money in high-risk, high-volatility equity products, financial planners say.

Kick off with a no-brainer fund

For a beginner, the road map to investing in the equity m a rke t could start with investing in index-based exchange traded funds (ETFs), popularly known as index funds, and which are often considered a no-brainer for any investor. The net assets values (NAVs) of these funds move almost in sync with the broader market index. Once the investor has some idea about how equity mutual funds work, the next possible step is to invest in a large-cap diversified equity fund. Usually such funds have higher risks and their NAVs also show higher volatility than the index funds, but just a bit more.
Large-cap schemes, with long years of history, usually maintain a well diversified portfolio. They always avoid putting a large part of their money into one or very few sectors. While going for a diversified fund, investors should also be mindful of the disciplined investment approach of the fund manager. The next step-up in the investment ladder for the investor could be midcap and small-cap funds, financial advisors say, and the next step should be sectoral funds. Before investing in sectoral funds, the investor could also consider investing in sectoral ETFs. "Once the investor is able to understand the nuances of risk and volatility associated with various kinds of equity schemes, he could then enter direct equities.

Day-trading an absolute no-no

Often it is seen that first-time investors not only take the plunge into the equity market but also start trading (buying and selling) during the course of a single day. Veterans of the stock market feel this is the most dangerous thing to do. Trading is not a plaything for novices in the market, they say. One needs some amount of training, experience and discipline to make money by day trading, they say.

Know the expense ratio...

As a mutual fund investor, one of the main things that you should keep in mind is the expense ratio, that is, the cost that your scheme charges you for managing your money. Although there is a Sebi-imposed higher limit to the expense ratio that fund houses can charge for each type of scheme, there are fund houses that operate with lower expense ratios compared to others.

Difference in expense ratios can have long-term impact on your portfolio corpus. Since mutual funds are long-term investment vehicles, even small differences in expense ratios can make a substantial difference over 10, 15 or 20 years.

For example, say you put Rs 1 lakh each in two funds. One has an expense ratio of 2.25% and the other 1.75%. Now suppose each has given an average annual return of 15%. Over a 15-year period, the fund with an expense ratio that's lower by just 50 basis points (100 basis points = 1 percentage point) will give you about Rs 46,000 more than the one with the higher expense ratio. Put another way, this additional Rs 46,000 that you get in the scheme with a lower expense ratio is nearly 8% of the corpus if you had invested in the fund with the higher expense ratio.


However, there is a caveat here: Expense ratios alone should not be the deciding factor in choosing a mutual fund scheme. There are a host of other factors, as discussed above, which should also be taken into consideration while deciding on a mutual fund scheme. Since we are assuming you are a first-time investor in the equity market, it is advisable to use the services of a qualified financial advisor or planner when you decide to start investing in stocks.

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

1. ICICI Prudential Tax PlanInvest Online
2. HDFC TaxSaver Invest Online
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4. Reliance Tax Saver (ELSS) Fund Invest Online
5. Birla Sun Life Tax Relief '96 Invest Online
6. IDFC Tax Advantage (ELSS) Fund Invest Online
7. SBI Magnum Tax Gain Scheme 1993 Invest Online
8. Sundaram Tax Saver Invest Online
9. Edelweiss ELSS Invest Online
   
   
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