Mutual Funds: A Brief Note for First-Time Investors

Mutual funds are known to greatly simplify equity investing, without a doubt. However, choosing the right mutual fund could prove to be a task of sorts for many new investors. 

For any first-time investor, the goal should ideally be to opt for a scheme that could give consistent returns without putting into too much risk, though. Also, the core mantra should be: don’t rush.

The idea is to start investing a small amount and get the hang of the ups and downs of the capital market.

Once an investor embarks on the mutual funds’ journey, they can go ahead and make nuanced investment planning over time. 

First and foremost, it is important to select the fund category. Depending on the objective, an investor can choose from any of the categories.

Aggressive hybrid funds: If an individual is new to equity investing and tax saving is not the goal, they can opt for aggressive hybrid funds Among all hybrid funds, this category gives the maximum exposure to equity (65-80%) while the rest is invested in debt (20-35%). The debt portion helps to cushion the decline in returns in case of severe stock market crashes. Also, these funds are less volatile as compared to pure equity funds. 

Equity-linked saving scheme (ELSS): When tax-saving is the goal, then opt for ELSS, which is also referred to as tax-saving funds. This fund does a dual job of wealth creation and tax saving. This is a pure equity fund that invests in shares of companies, irrespective of their market capitalization. Generally, most tax-saver funds keep the maximum allocation to large-cap stocks (70-80%). These funds have a lock-in period of three years. 

Flexi-cap funds: For those who have prior experience in equity investing. These funds are quite similar to ELSS funds. These have complete flexibility to choose stock of any market capitalization. They do not give any tax benefits, and there is no lock-in period. The fund is ideal for new mutual fund investors with about 4-5 years of experience in equity investing. The next step is to pick a fund from the chosen category. Even within each category, there are a lot of fund options. 

In mutual funds, each category has mutual funds schemes of different fund houses or asset management companies (AMCs). They all differ in terms of expense ratios and the quality of practices in their operations and research. 

Ideally, the fund should have a good long-term performance. As a first-time investor, check out the expense ratio, which should not be too high as it reduces the returns. 

Avoid the fund that has recently witnessed a change in the fund manager as this makes its performance history less dependable. Besides, avoid any newly launched funds. Moreover, it is important to start and remain consistent.