We have found a new way to educate new investors flocking to invest in mutual funds. Eager to make extra returns after banks slashed interest rates on deposits after demonetisation, these investors have absolutely no clue about how funds work. We generally advise new investors to start with ultra-short term funds because these funds offer a good experience in terms of returns, risk and liquidity. These debt funds are the best ‘first-step’ towards equity investments or any other type of mutual fund investment in the future
those investors typically do not have any previous investing experience and they are scared of volatility in the market and concerned about liquidity of their investments. These individuals will ask you things like what if we need the money tomorrow or what if the value of our money goes down. The fear is majorly because of the lack of experience in investing. So, better than asking them to go for a balanced fund directly, it is good to get them started with a low risk product like an ultra-short term fund. They get better than what they are getting from their bank deposits
We ask new investors to the stock market to opt for equity-oriented hybrid funds or balanced funds. These funds invest in a mix of equity and debt and they are comparatively less volatile than pure equity schemes that invest their entire corpus in stocks. However, a totally inexperienced investor may still find them risky and volatile. Ultra short term schemes, on the other, are pure debt schemes that can be used to park money for a few months to a year.
These funds have offered an average return of 7.5 per cent in the last one year. They also have a small edge over bank deposits when it comes to taxation. If investments in ultra short term schemes are held over there years, returns are taxed at 20 per cent with indexation benefit. If investments are sold before three years, short term capital gains are added to the income be taxed according to the income tax slab applicable to the investor.
We get these investors start with an ultra-short term fund. Later, when they are convinced and happy with the investment, it serves as a mother fund for STPs in equity funds
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