Balanced funds and Monthly Income Funds are best suited for new investors | New Fund Offers not suited for new investors as well as old investors

October 8th, 2010| Education.

Balanced funds and Monthly Income Funds are best suited for new investors | New Fund Offers not suited for new investors as well as old investors

Stock markets are slowly recovering and the investors are showing interest in stock markets.  People who are new to stock markets are also showing interest to invest in shares.  So Mutual funds which were reluctant to introduce new schemes are coming up with New Fund offers.  Let us see which scheme should be selected by new investors who cannot bear many risks.

No to NFOs

Companies are introducing new funds offers to the new investors.  Expert advice is to keep away from these NFOs.  This is applicable to not only new investors but also to old investors.  It is better to invest in a scheme whose method of functioning is known than to invest in a new fund whose method of functioning is not known.  Many investors feel that since the unit value of NFO is Rs.10, more number of funds can be bought whereas the value of unit in old funds is more and so less number of funds comes for the same money.  In the beginning of 2007, 2008, when the stock market was growing rapidly, Mutual Fund NFOs, mainly Infra Funds flooded the stock market.  People who invested in these funds had not recovered till now.  But old funds could cover up their losses.  So experts’ advice is that it is better to keep away from NFOs.

Varieties in Funds

Mutual funds are divided in to Equity, Debt, Balanced, Liquidity and Thematic Funds according to the investment methods.  If more than 65% of the money collected from the investors is invested in shares then they are called Equity Funds.  In these Equity funds if investments are made to a particular field or according to a theme they are considered as Thematic or Sectorial Funds.  Risk is more in these funds than Diversified Equity Funds.

If the more than 65% of the money collected from the investors is invested in loan or money markets, they are considered as Debt schemes.  Income is limited in these schemes.  Risk is also very low.  If investments are made in both debt as well as equity, those are called Balanced Funds.

Balanced Funds

New investors should invest in Balanced Funds which invest in both equity and Debt schemes than in Equity schemes which have more risk factors.  Because balanced funds invest in both debt and equity and if the market is in losses, the loss can be recovered by the income from the debt schemes.  If the market is growing, income from both equities and debt schemes can be enjoyed.

Not only that, Balanced funds invest 65% in Equities to get tax exemptions.  Tax burden is more on investments made in debt schemes.  Tax is to be paid on short term gains in Debt schemes according to the personal income slab of the investor.  Tax is 10% without indexation in Long term Capital Gains and 20% with Indexation.  Long Term Capital Gain Tax is not applicable to Equities.  10% tax is to be paid on Short Term Gains.  Balanced Funds allot up to 65% for these tax benefits.

Balanced funds are suitable for new mutual fund investors and for those people who want to invest in the name of children.  New investors should first invest in Balanced Funds and after totally understanding the funds it is an intelligent decision to opt for equity schemes according to their personal risk capacity.

For more interest

Many people want more interest than the bank interest.  But are not ready to take up any risk.  Monthly income plans offered by Mutual Funds are suitable for such people.  15% to 20% of the amount collected from the investors is allotted to equities and the remaining is allotted to Debt schemes which have less risk.  These plans give monthly income but the income is not fixed.  Reason for this is some part of the amount is invested in equities.  When the stock markets are growing, MIPs give income more than the Bank interest rates.  Monthly Income Plans are suitable for those who want more income than the bank interests and who can afford some risk.  These are best suited for senior citizens.

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