Mutual Funds for a beginner - Your First Mutual Fund Investment?

Mutual Funds are one of the first investments that everyone wants to make. Reasons are very simple, it is super easy to invest in them and they are literally everywhere. Your uncle is recommending you the same, your friend has invested in it, even the influencers are talking about it. 

Many beginners get stuck with which mutual funds to invest in. There are over 2500 schemes across 44 AMC i.e. like there are over 4000 flavors available across 50 ice cream shops and one can only eat so much.

When it comes to ice cream, we all know that chocolate or candies are the standard safe bets that one can start with. Similarly in Mutual Funds, there are some categories which you can look at when you are a beginner. 

 

Before you start the process of Investing in Mutual Funds, check out the below 3 steps.

 

Step 1 - Understand what a Mutual Fund is - watch our YouTube video to know more about it.

Step 2 - Types of Mutual Funds and what do they mean - read our articles on this - Types of Mutual Fund

Step 3 - Know the basics of Investing your money that high risk = high returns and low risk = low returns. So when you are investing in Equity Mutual Funds, it sure does give you higher returns but has higher risks. On the other hand, when you invest in Debt Mutual Funds, it gives you lower returns but has lower risk. The only way to manage this high risk of equity to earn higher returns is to invest for a long  period of time (i.e. for more than 3 years) and stick to debt for short term investments. (Refer to the article to know how to invest your money based on your goals - Investment for children's higher education)

 

Mutual Funds to focus on as a beginner

 

Make your first investment in Debt Mutual Fund 

 

For the first time Mutual Fund investor, we would recommend going for a liquid mutual fund or an ultra short duration fund. These Mutual Funds basically invest in T-bills or short term debt investments with a maturity of not more than 90 days to 6 months. This ensures that there is liquidity and interest rate risk is minimized . Ensure that the underlying investment of the debt funds are all AAA rated to ensure your credit default risk is minimized. 

 

We recommend beginning with these funds as the risk is low and it will guide you to be more familiarized with the process of investing.

 

If you are skeptical of Equity, Invest in Hybrid Mutual Funds

 

Next investments you can try are Hybrid Mutual Funds such as Balanced Advantage Funds or Dynamic Asset Allocation Funds. These Mutual Funds primarily invest in a mix of debt and equity giving a balance of debt along with some growth exposure to equity. Do check the underlying portfolio mix of the Mutual Fund before you invest in them. For example, currently as of October 2021, ICICI prudential Balanced Advantage Fund has 60% in Equity and 40% in Debt. 

By Investing in a hybrid fund, you are not getting a 100% exposure to equity and it works good for you if you have never invested in equity and are skeptical to invest in it. By investing here, you will understand how volatile they can be and understand your risk tolerance better.

 

Going for Equity Mutual Funds as a beginner

 

Where you are comfortable with investing in Equity, you can try investing in either large cap mutual funds or index mutual funds. 

 

 Index fund is a mutual fund which invests in stocks which are a part of the indices that they track. The index can be the benchmark Nifty 50 index or it can be a small cap index or a sectoral Pharma Index.. There are index funds which track these indices and then change their allocation as per the changes in the index. Index Funds that track the Nifty 50 Index are a good starting point  as they give you exposure to the top 50 companies listed on the Indian Stock exchanges i.e. the large-cap companies. There is little to nil interference from the fund manager as they track the underlying index. Also, the expense ratio is lower compared to other actively managed funds. Hence, as a beginner a Nifty50 based index fund can be a good bet to begin with.

 

Large Cap Fund - These mutual funds select at least 80% stocks for investment from the largest 100 stocks listed in the Indian markets (highest market capitalization). These funds  may have higher expense ratios compared to Index funds as they are actively managed by the fund manager.  An actively managed fund attempts to beat the returns from an index fund by selecting stocks that the Manager expects will outperform. 

 

You can select between an active fund or a passive fund based on how you want your money to be managed.  

 

Useful, simple to understand and easy to execute. These should be the qualities of your first mutual fund. 

 

Wealth Café Advice:

Do not look at making quick returns by investing in mid or small cap mutual funds when you are a beginner. Start with large cap  mutual funds or hybrid mutual funds, understand them better, learn more about them and then allocate your money properly across other categories of Mutual Funds. You can start your investments in 2-3 Mutual Fund Schemes and build your portfolio over time. But be sure to keep a tab on the total numbers of Mutual Funds you own. Read our article - How many mutual funds to invest in to learn more about this.

 

To sum it up, your experience with your first fund will in many ways set the course for how you invest. This is why you do not want to overcomplicate the decision.

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

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