What does investing in mutual funds for beginners look like? We explain

In the world of the internet, where information is available on the web, it should not come as a surprise with the new generation inquiring about some of the best mutual funds for investment. The appetite for returns is too high at this age and so is their ability to tolerate risk. 

Considering how mutual fund investment is mostly about managing and assimilating risk in a bid for increased earnings, beginners must start by identifying the types of mutual funds in the market. They can then correlate these mutual funds’ performance with their financial goals, be it long-term or short-term.

Starting with ELSS benefits

New-age investors often confuse returns with quality. True, that a good fund will always deliver good returns, but should past returns be the only parameter for choosing mutual funds? Beginners looking for the best mutual fund plan must start with tax-saving funds, also called equity-linked savings schemes (ELSS), that will not only help them save taxes under Section 80C of the Income Tax Act, 1961 but also enhance their understanding of how equity investments help to earn market-linked returns.

To start with, they may look at some of the best tax-saving mutual funds based on past five or 10-years’ returns while also looking at other parameters like expense ratio, exit load, portfolio structure, portfolio turnover ratio, volatility through standard deviation, fund manager’s experience, and more.

You can view some of the top tax-saving equity mutual funds below.

Earning from index funds

Very few investors stick to allocating their earnings to one fund only. Many of them believe that investing in more funds translates to higher earnings, thus, explaining their propensity to invest in more funds. However, not all are adept at personal finance nor are willing to seek professional advice. The Do-It-Yourself (DIY) style of investing prompts many of them to then try their hands at investing in Index funds.

Index fund investing helps as it is all about putting money in a fund that invests in a basket of stocks following a particular index. Those unable to compare fund managers’ performance can rely on this passive style of investing money in the market. Also, statistics underline how very few actively managed funds have managed to beat index funds in the past, thus, justifying the idea of investing in at least one index fund.

The new investors may choose between Nifty50 funds and the Nifty100 Index funds or from some of the prominent Sensex funds launched in the market. Some index funds that have gained popularity in the past few years have been listed in the table below.

Moving on to large-cap funds

You cannot deny the benefits of putting money in large-cap funds. Since large-cap funds mainly invest in bluechip companies, there is less risk of these funds succumbing to unforeseen market volatility. Though the inherent risk factor is always there, the chances of these funds showing greater resilience than mid-cap and small-cap funds are much more. Investors are not thrown off guard in case of a sudden tumult, thus, hinting at much lesser volatility or lesser deviation from the benchmark returns.

Some popular large-cap funds that new-age investors may consider for a prolonged investment journey are listed below.

New-age investors may consider putting money in other kinds of funds like sectoral/thematic funds, dividend yield funds, focused funds, value funds, flexi-cap funds, and more. However, a lot depends on their risk appetite and their willingness to dabble in other kinds of funds.

It serves better if new investors start with two or three mutual funds only to invest before deciding to work on a hefty investment portfolio. Also, before they decide to invest, they must look at the following essential factors. These include:

Risk and return trade-offs are different in different types of mutual funds: The fact that different mutual fund categories often have varying risk and return trade-offs is an important element that most investors tend to ignore. It can be difficult for new investors to gauge the various levels of risk in any particular mutual fund’s component using specific elements or scales because each distinct category of mutual funds has a different amount of risk.

Don’t fall for market gimmicks: Choose your investment based on what suits you best. Restrain from succumbing to social media influencers’ advice. Refrain from falling prey to glitzy advertising that showcases mutual fund investments as fanciful money-making options. An evaluation of your risk tolerance and investing and financing goals should be the first step in your quest for the finest mutual fund to invest in. 

If you want to make investments and capital gains that will last longer than a year, be sure to put your money in long-term mutual funds, where it will grow over at least a year. If you prefer present income, however, be sure to put your money in short-term and hasty schemes.

Pay attention to fund performance consistency: It’s crucial to think carefully about the calibre, consistency, and duration of performance before making an investment in any mutual fund. Instead of concentrating on how much money the scheme has lately made, take into account how it has fared over the previous five years to a decade. This demonstrates whether it can offer you consistent returns or only variable ones.

Do not over-diversify your investments: Although it is well known that “diversification reduces risk”, excessive diversity in investment options may not always lead to greater risk mitigation. Funds will only improve gains to a modest degree of diversification. Also, the biggest con to over-diversification of the mutual fund portfolio is that it may cause investors to put their money in underperformers, thus, reducing the overall benefit from these funds’ earnings.

The best way for beginners to invest in mutual funds is to first study the various categories of mutual funds in the market before moving on to decide which one of them suits their financial goals best. Then, decide how much money they must invest and whether the investments would be regular or sporadic.

Apart, deciding on the investment tenure and syncing it with financial goals is important. For example, long-term mutual fund investments can help to garner enough money to buy a dream home or create a sufficient post-retirement corpus or enough wealth to pay off for children’s higher education and marriage.

A lot depends on the investors’ outlook and familial responsibilities too. To ensure the right mutual fund investment, beginners must take care to take a cue from those already invested in the market but never ape them as emulating others’ investment styles would only cause them to compromise with their financial independence in the long run.