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A beginner’s guide to mutual funds – 7

What is special about these schemes?
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What is special about these schemes?

First, aggressive hybrid schemes are recommended by many mutual fund advisors because they believe the unique portfolio of mix of equity and debt makes these schemes relatively stable in times of adverse conditions in the market. As far as ELSSs (Equity Linked Saving Schemes) are concerned, many advisors say the mandatory lock-in period of three years help investors to get used to the ups and downs typically associated with equity investments.

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So, which one should I choose?
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So, which one should I choose?

Most experts believe that ELSSs are the best option for new investors if they haven’t claimed the tax deduction available under Section 80C of the Income Tax Act. These schemes are essentially multi cap schemes that invest across market capitalisations and sectors. Multi cap schemes are considered ideal for regular investors investing a modest sum. Also, as said earlier, the mandatory lock-in period would force the investors to stick to the scheme even when the market is going through a lot of pain. That experience would offer the insight to navigate troubled times in their investment life.

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Why the emphasis is always on safety?
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Why the emphasis is always on safety?

Many new investors often tend to get scared during a sharp fall in the market or prolonged depressed market conditions. Their first reaction is to stop their future investments or pull out their investment from the market. They believe this strategy would help them to preserve their capital or maximise wealth. However, it is extremely important to continue with your investments in a depressed market to maximise wealth. Simply put, a falling market is offering you stocks on discount sale. Missing it would rob you of a chance to create wealth over a long period.

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So, should you stick to safer options?
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So, should you stick to safer options?

Sticking to safer options and gaining some experience would help investors immensely in their investment journey, say mutual fund advisors. However, this doesn’t mean that you should scrupulously avoid riskier investment options. If you understand your risk profile and what the extra risk means to your investments, you may go for them. Similarly, if you have the help of a mutual fund advisor, you can go for riskier options like mid cap and small cap schemes.

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Choose schemes based on these factors
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Choose schemes based on these factors

You should ideally choose your mutual fund schemes based on your financial goals, time in hand to achieve those goals, and your risk-taking ability. As you know, you should choose equity mutual fund schemes only for your long-term goals. The next thing is to choose an equity scheme that matches your risk profile. For example, you should choose a large cap scheme if you are a conservative equity investor. A moderate risk-taker can opt for a multi cap scheme, and aggressive investors can opt for mid cap and small cap schemes

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Be mindful about the risk
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Be mindful about the risk

Many investors are extremely aggressive when the market is hitting new peaks every week. They believe their risk-taking ability is infinite during such phases in the market. However, once the market hits a rough patch, they realise the real meaning of risk when they see their investments lose value sharply. You should avoid this trap. Don’t overlook risk associated with your investments.

Also read:
A beginner’s guide to mutual funds - 1
A beginner’s guide to mutual funds - 2
A beginner’s guide to mutual funds - 3
A beginner’s guide to mutual funds - 4
A beginner’s guide to mutual funds - 5
A beginner’s guide to mutual funds - 6

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