I am a 19-year-old undergraduate student and I am planning to invest with my pocket money. I have saved close to ₹21,000. Please tell me what will be best for me and procedure for the same.

Animesh Kumar

It’s great that unlike many young people, you saved your pocket money and want to invest it. You have a plethora of investment options — bank fixed deposits, post office schemes, stocks, mutual funds, etc. Go with equity mutual funds. You are young and, assuming you can take risk, stay invested for five years at least. Well-run equity mutual funds, while they can be volatile in the short term, tend to be more rewarding than debt options such as bank deposits and post office schemes in the long run.

Equity mutual funds are also superior to putting money directly in stocks, especially for new investors who may lack the know-how of stock picking and could burn their fingers. Equity mutual funds, run by professional fund managers, invest in a basket of stocks, thus reducing risk. To begin with, go for large-cap oriented funds, or equity-oriented balanced funds that invest mostly in equity (at least 65 per cent of the corpus) and a portion in debt, reducing risk.

Among the fine choices in large-cap category are Birla Sun Life Frontline Equity, SBI Bluechip and Quantum Long Term Equity. In the equity-oriented balanced category, HDFC Balanced, ICICI Prudential Balanced and L&T India Prudence are good picks.

Large-cap oriented funds and equity-oriented balanced funds are less volatile than funds that invest mostly in mid-cap and small-cap stocks. This is especially important now with the market, particularly many mid-cap and small-cap stocks, seemingly overvalued after the sharp run-up.

Yes, large-cap and equity oriented balanced funds may not deliver as well as mid and small-cap funds in raging bull markets. But their ability to contain downside when the tide turns is a key positive.

The funds recommended above have demonstrated the ability to contain losses in weak markets and also participate in market rallies.

Also, instead of deploying ₹21,000 at one go, staggered investment of ₹1,500 each over the next seven months through the systematic investment plan (SIP) route in one large-cap fund (Quantum Long Term Equity) and one equity oriented balanced fund (HDFC Balanced) is suggested.

This will help you benefit from market volatility by averaging the cost of purchase of units. Many fund schemes require SIP instalments for at least six months.

Going forward, as and when you save pocket money, continue to invest in the fund. Once you start working, invest through the SIP route in three to four good funds. The healthy return potential of equities and the power of compounding will likely reward you handsomely in the long run.

Invest in mutual funds through regular plans (via distributors and brokers) or directly with the fund house, either at their office or through their portals or through their registrars or through platforms such as MF Utilities India. Going direct saves distributor costs but is recommended only if you have the know-how to pick good funds.

I want to start SIPs in ELSS mutual funds. Please suggest three good funds.

Kavindra Salunke

Equity linked savings schemes (ELSS) give twin benefits: you get exposure to equities and also save tax, since the investment is eligible for tax break under Section 80C up to ₹1.5 lakh a year. But ELSS investments are subject to a three-year lock-in. This is also applicable for every SIP investment in ELSS.

You can hold on longer if you choose to. The lock-in ensures that you stay invested for at least a reasonable period. But the flipside is that you cannot exit even if the fund is doing badly. Given the lock-in, a lumpsum ELSS investment may be operationally more convenient than SIPs.

That said, given the sharp market run-up, SIPs in ELSS funds is also not a bad idea — it will help you navigate market volatility better and benefit from cost-averaging if there is a downturn. Among the good ELSS funds are DSP BlackRock Tax Saver, IDFC Tax Advantage and Birla Sun Life Tax Relief 96. These funds have beaten their benchmarks convincingly and figure in the top quartile in the category over the long run.

Send your queries to mf@thehindu.co.in

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