scorecardresearchNew investors: How to choose your first mutual fund? 6 experts answer

New investors: How to choose your first mutual fund? 6 experts answer

Updated: 14 Oct 2022, 01:31 PM IST

New investors on the block are confused between so many mutual funds that they seek help before making the first investment. Still, others look at previous years’ returns and expense ratio before putting their money in one.

Choose your first mutual fund investment with care. 

Choose your first mutual fund investment with care. 

We talk so much about investments in mutual funds that equity investing seems to be now ingrained in our daily or monthly purchases. However, first-time mutual fund investors are not sure how to start. With so many registered fund houses in India offering an array of more than 2,500 mutual fund schemes, it becomes difficult for many to choose the way that suits them best.

Starting with mutual fund investments

A tête-à-tête with the country’s top financial advisors revealed how the choice of mutual fund investments depends on myriad factors such as financial goals, affordability and our understanding of finances. Whether we have enough emergency corpus to take care of our families and for how long we wish to stay invested are other factors worth considering. 

Viral Bhatt, Founder, Money Mantra explains, “First-time investors should choose a mutual fund scheme keeping their goals, risk-taking ability and time horizon in mind. They could opt for goal-based planning using websites or the services of a financial planner or distributor. Investors could work out an asset allocation plan that guides them on what percentage they could allocate across asset classes like equities, debt and gold.”

When asked the kind of mutual fund that new investors must invest in, Muthukrishnan, a Chennai-based Certified Financial Planner said, “Despite increasing retail inflows, a vast majority of Indians are not exposed to equity. The first fund should be a well-diversified equity fund. Hence flexicap funds are the best choice. These funds give exposure to all market caps across different industries and sectors. Also, these flexicap funds can be chosen from any fund house. The fund should preferably have at least 10 years track record and must not look at recent performances. What matters is consistent long-term performance.”

Deepali Sen, founder partner, Srujan Financial Services LLP (a Mutual Fund Distributor) briefs, “For a first timer, it is important that he chooses well-diversified equity mutual funds. Also, he should invest in a staggered way and diversify across two to three mutual funds. In addition, for a time horizon of 10 years, one could invest at least 75 per cent of equity funds in large-cap schemes and the remaining across diversified mid and small-cap schemes. Exposure to small-cap schemes not exceeding 10 per cent of equity investments.”

Gaurav Rastogi, CEO, (an online mutual fund platform) says, “If someone has a little bit of experience with tracking markets and understands volatility then lowest cost index funds are ideal to start. For someone completely unaware hybrid funds can be a good introduction to investing. Both provide simple learning steps at a low cost for investors to start understanding the nature of volatility and also their reaction to it.”

Explaining how the duration of fund investments matters, Bhatt adds, “Typically if they wish to invest for a time horizon of one day to less than three years they could go with debt-oriented funds or arbitrage funds. For three to five years they could consider hybrid funds which are a mix of debt and equity. If their goal is five to seven years away, then they can consider higher-risk products like equity-oriented mutual funds.”

Not all new investors may be aware of their investment horizons. They might want to park their funds for the first few years thinking that they would decide their investment portfolio depending on returns that they earn within that period.

Notwithstanding factors such as time horizon, risk profile etc, Suresh Sadagopan, founder, Ladder7 Financial Advisories, says, “For a first-time investor, they could start with a passive all-market index fund like NIFTY 500. This is comparatively low risk with no fund manager risk and full market participation. If a person wants to stay conservative, they could invest in a NIFTY 50 index fund which will essentially invest in the top 50 companies only.”

Dev Ashish, founder, Stable Investor looks at first equity investment from a tax saving point of view. He says, “If they also need to do some tax savings, then it is best to go for a tax-saving ELSS fund. If tax saving is not required, then one can simply start with a Nifty50-based Index fund and/or a Flexicap fund. Depending on the monthly investment amount, one should start with one to three funds max.”

Which mutual fund one must start with?

Hinting at any particular fund wherein one may invest and stay invested involves a lot of biases for and against some funds. Not all funds perform equally well. This is also true considering how some investors have repented after having parked their earnings in funds that performed relatively well in the first few years but fizzed out with market tumults in the longer run.

As an investor one is entrusting the fund house to manage your hard-earned money and hence it is important to choose one with care. Decisions taken by the fund house and its fund manager could have a significant impact on the investment performance of the scheme. Financial planners suggest investors consider the pedigree of the fund house before choosing one. Check how the schemes have performed, the history of the fund house, the management track record and the performance of fund managers before zeroing down on a scheme.

Prathiba Girish, founder, Finwise Personal Finance Solutions suggests shares, “I would not like to name a specific mutual fund but first-time investors may consider a fund which manages the debt-equity allocation dynamically using certain preset rules. These are commonly referred to as dynamic asset allocation or balanced advantage funds. Well-managed funds in this category have historically delivered equity like returns at a much lower level of volatility over longer timeframes.”

Sadagopan adds, “One can choose any NIFTY 500 Index fund. There are just a couple of them for now. Motilal Oswal Nifty 500 Fund has been one of the first ones and may be considered. NIFTY 50 Index fund may be considered if one wants to invest in Bluechip stocks only. HDFC Index Fund Nifty 50 plan is one of them that can be considered.”

Bhatt advises, “If you are investing only for five years, we would ask you to invest in safer options. If you don’t want to take risks, you should invest in debt mutual funds. Debt mutual funds invest in debt securities. They are relatively safe and they can offer marginally higher returns than bank deposits. If you are ready to take risks, you can invest in balanced advantage schemes. These schemes decide the equity allocation based on the market conditions. They are safer than pure equity schemes.”

“We would not recommend pure equity schemes with an investment horizon of five years. Invest in them only if you have an investment horizon of at least seven years. However, stick to safer options like large cap schemes and Flexi cap schemes. Don't chase returns and get into risky options like small-cap fund schemes, sector schemes, etc. These schemes are meant for aggressive investors who are ready to take risks and face volatility.”, added Bhatt.

A fund of funds is a mutual fund that invests in other mutual funds.
First Published: 14 Oct 2022, 01:31 PM IST