Mutual funds that are tax efficient, little effort for a new investor

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Even if you can afford a luxury car as your first car, it probably makes sense to buy a somewhat old used car as your first car. For all kinds of reasons that are obvious to anyone in their right mind, a used car is a good “starter car”. On Wikipedia, you can also find information on a particularly American concept called a “startup marriage,” but we won’t go into detail.

In a somewhat similar fashion (similar to cars, not weddings) there is also what you might call “seed money”. These are categories of mutual funds that, in addition to their straightforward investment characteristics, are particularly suitable for investors who are only dipping their toes into investing in mutual funds. In addition, seed funds are not just seed money, but simple funds. That is, these are funds that can serve the entire investment objective of savers who like to keep it simple and don’t have the time or inclination to spend too much time on investing. study investments.

The first type of mutual fund that serves as a good start-up fund is the tax savings fund. The usefulness of savers as a starter comes from their legal status as savers, as well as their three-year blocking period. Often, newbie equity investors are tempted to withdraw their investments when they reach their first period of volatility or decline. However, in tax saving funds, because of foreclosure, they end up getting good returns. Three years is almost always a long enough period for long-term returns on equity to do their magic. At the end of the foreclosure, the newbie is convinced of the value of patient investments in equity funds.

After tax savers, the first true category of start-up funds as well as simple funds are hybrid funds, or as they are more commonly known, balanced funds. The role is simple: investors need a set of characteristics, the main one of which is the allocation of assets at different points of the risk-return spectrum, the allocation of assets among them and the rebalancing of assets on a defined basis when the asset allocation is out of whack. .

When stocks are growing faster than fixed income, which you would expect most of the time, you periodically sell equity investments and invest the money in fixed income to restore the balance. When equity starts to lag behind, you periodically sell some of your fixed income securities and switch them into stocks. This beautifully implements the basic idea of ​​making a profit and investing in the downed asset. Inevitably, things get average again, which means that when equity starts to lag behind, you’ve shifted some of your profits into a safe asset, reducing the volatility that will panic a new or even an old investor.

You can do all of this manually, so to speak. You can choose a set of debt funds, a set of equity funds, and use the tools in Value Research Online to track and correct your allocation. Or, if you are just starting out, you can try a type of fund that does everything in one package. It’s undemanding, practical and tax-efficient.

Why does this approach work? The two types of financial assets, equity and debt, are not only different, but complementary. There are two main ways that an investment can make money. First, by lending money to someone who pays interest, whether it’s a business or a government. And second, by becoming a co-owner of a company, as well as by being a shareholder. The characteristics of both are such that combining them is the best approach.

Under Sebi’s formal codification of the different fund categories, we now have several hybrid fund categories that can meet different asset allocation needs. They range from very conservative funds, which are basically fixed income funds with a slight trim of equity, the other way around. So any investor can find something that perfectly suits their needs. So the best option would be to pick one or two mutual funds and start SIPs, and the funds themselves would do the balancing, which are hybrid funds.

(The author is CEO, Value Research)

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