Interested in investing? Get your basics right

Why I talk about mutual funds

I recommend mutual funds only because several of those who write to me would like to change their money plans, mid-course. They are not in a position to be able to say whether they will be able to set aside sums for a long period.

Sometimes, they also need money for unexpected needs.

Since mutual funds are liquid (can be easily bought and sold), do not require huge initial investments or the regular commitment of a fixed investment periodically, the flexibility is higher.

Moreover, a number of individuals have no idea about the stock market or how to pick a stock. Hence, mutual funds are the next viable option.

On mutual fund expenses

The maximum load (fee) that a mutual fund charges is 2.25%. The annual expenses of the most expensive funds are not more than 1.75% of its assets (the amount of money available with them for investment).

The regulation of the Securities and Exchange Board of India, the mutual fund regulator, does not permit expenses to be more than 2.5%.

On ULIPs

You can use unit linked policies too, which cover insurance and investments. But it is important that you understand what the insurance cover is and what the investment is.

An ULIP -- Unit Linked Insurance Plan -- is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you/ your beneficiary gets from a life insurance policy) and the balance will be invested in whichever investments you desire -- equity, fixed-return or a mixture of both.

Investments in ULIP work as a tax benefit under Section 80C.

However, don't mix the two -- insurance and mutual funds -- just to save some taxes.

If you are looking for a tax-efficient and lower cost investment option, consider a Systematic Investment Plan in an Equity Linked Saving Scheme.

An SIP allows you to put in small amounts every month into your fund. Depending on the NAV at that time, units are allocated to you.