Mutual funds have become extremely popular among retail investors in India in the last few decades. They offer a convenient way to invest in a diverse set of assets like stocks, bonds, money market instruments etc. based on one’s financial goals and risk appetite. Choosing the right mutual fund to invest in can be an overwhelming experience for beginners given the wide variety of schemes available. This article discusses the ideal mutual funds that first-time investors can consider to start their investment journey.
Types of Mutual Funds Suitable for Beginners
1. Equity/Growth Funds
Equity funds predominantly invest in shares of companies across market capitalizations and sectors. They aim to generate higher inflation-adjusted returns over the long term but are more volatile compared to other fund types. Beginners can start with diversified equity funds that invest across sectors and market caps. Examples – Axis Bluechip Fund, HDFC Top 100 Fund, Mirae Asset Large Cap Fund.
These funds have delivered returns of 10-15% over the last 5-10 years. Investors should stay invested for at least 5 years to benefit from the long-term capital appreciation potential of equities.
2. Hybrid Funds
Hybrid funds invest in a mix of equities and fixed income instruments. They aim to provide moderate growth along with lower volatility compared to pure equity funds. Examples – HDFC Hybrid Equity Fund, ICICI Prudential Equity & Debt Fund, Kotak Equity Hybrid Fund.
These funds have given 8-12% returns over the past 5-10 years. They are suitable for investors looking for a balanced portfolio instead of pure equity exposure.
3. Tax Saving ELSS Funds
ELSS (Equity Linked Savings Scheme) funds are a type of equity fund that offers tax deductions up to ₹1.5 lakhs under Section 80C. Examples – Axis Long Term Equity Fund, Mirae Asset Tax Saver Fund, Canara Robeco Equity Tax Saver Fund.
Apart from tax benefits, ELSS funds have the potential to deliver good inflation-beating returns of 12-15% over long periods of 5 years or more. They have a lock-in period of 3 years which aids long-term wealth creation.
4. Debt Funds
Debt funds predominantly invest in fixed income instruments like government securities, corporate bonds, money market instruments etc. They are less volatile and aim to provide stable income over time. Beginners can consider short to medium duration or banking/PSU debt funds. Examples – IDFC Bond Fund, ICICI Prudential Banking & PSU Debt Fund, Kotak Savings Fund.
These funds have given 6-8% returns over the last 5 years with relatively lower volatility. Debt funds are suitable for conservative investors looking for some capital appreciation along with regular income.
Factors to Consider Before Investing
Here are some key aspects for beginners to consider before choosing a mutual fund:
- Risk appetite – Match the fund type to your risk tolerance. For example, hybrid funds for moderate risk or debt funds for low risk appetite.
- Goals and investment horizon – Equity funds suit long term goals above 5 years, while debt funds can meet shorter term needs.
- Past performance – Check consistent performance over 3-5 year periods.
- Costs – Lower expense ratio ensures higher ultimate returns.
- Fund manager experience – An experienced fund manager can better navigate market ups and downs.
- Asset size – Bigger funds can have lower costs due to economies of scale.
How to Invest in Mutual Funds as a Beginner
The process of investing in mutual funds is fairly straightforward for beginners:
- Open a mutual fund investment account either directly with the fund house or through an online broker.
- Choose a fund that matches your risk profile and investment duration.
- Fill out the application form and complete KYC requirements.
- Make a lump sum investment or start a SIP (Systematic Investment Plan) for periodic investments.
- Monitor the performance of your fund periodically and hold for long term.
- Redeem units when needed by filling out the redemption form.
To summarize, equity funds, hybrid funds, ELSS funds and debt funds are ideal mutual funds for beginners to start their investment journey. By carefully evaluating one’s risk tolerance, investment horizon and goals, a suitable mutual fund scheme can be chosen. Investing through SIPs allows wealth creation through the power of compounding over time. However, patience and long-term disciplined approach are vital for success.