IMPORTANCE OF FIRST MUTUAL FUND

The first fund you buy plays a major role in making or breaking your belief in stock investing. The experience earned in first investment generally becomes driving force for future investment decisions. I have come across so many people, who have invested in mutual funds seeing the great returns in last few years but find themselves in unchartered territory of negative returns and thinking to get out as soon as their investment turns green.

The above investing behavior is very common and often lacks proper financial education among common people. The prudent investing behavior is more essential than selection of best performing mutual fund.

It is therefore utmost important that investor to invest in right funds by right approach to fulfill their goals of high returns without losing their sleep.

There are two types of funds that are uniquely suitable as beginner funds. These are Tax Saving Funds and Balanced Funds.

Tax Saving Funds : Tax saving funds or Equity-Linked Savings Schemes (ELSS) are basically all-equity funds in which investments are eligible for tax exemption under Section 80C of the Income Tax Act. Under Section 80C, you can invest up to R1.5 lakh in a set of instruments, one of which is ELSS funds. Since they are equity funds, you should invest in them for the long term. In the case of ELSS funds, this long-term imperative is enforced under tax laws through a three-year lock-in. As a result, investors tend to have a good experience as they receive reasonable returns from these funds. Moreover, the tax-break acts as a natural boost to returns.

Balance Funds : Balanced funds, also called hybrid funds, combine equity and debt investments in a certain ratio. In order to maintain this ratio, the fund manager will typically disinvest from holdings that have gained more and invest in holdings that have gained less. This of course is asset rebalancing.

Effectively, gains that are made in equity are protected by debt. The great advantage of balanced funds is that they are inherently safer than pure equity funds. They gain well when the markets gain but when the markets fall, they fall less sharply, thus protecting gains that were made in better times.

To sum it up, your experience with your first fund will in many ways set the course for how you invest. Keep things simple by going for an equity mutual fund that will help you realize higher returns. To realize tax savings from your investment, opt for an ELSS fund. Finally, think long term.