Best Mutual Funds for Beginners to Invest for Long Term

September 2, 2022 Mutual Fund

Nearly everyone has become more mindful of their finances since the onset of the global pandemic. Many of you keep looking for effective ways and alternatives to invest your hard-earned money smartly. While there are numerous investing options accessible today, mutual funds have emerged as a mainstream investment option for many individuals, especially the millennial generation.

Mutual Funds are an assortment of professionally administered funds, which is why many investors who lack an in-depth understanding of financial markets contemplate investing in Mutual Funds. Moreover, mutual funds have attracted plenty of attention due to several advantages like it assists one in building a diverse investment portfolio, offers an affordable way to save for retirement and helps one achieve their financial goals for the short or long term, and most importantly, mutual funds offer active risk administration which is required in volatile markets.

Consequently, there are few elements that drive investment in mutual funds for beginners or young investors, mutual funds provide diversification across multiple asset classes and sectors, and you can invest without opening a Demat Account. Under mutual funds, you have two options lump sum investment or Systematic Investment Plans (SIPs). Through SIPs, you can simply start investing with a small amount (as low as Rs 500/-) which is lighter on your wallet, benefit from rupee-cost averaging and power of compounding, you can initiate automated monthly online SIP instalments; this instils financial discipline and a good habit of investing regularly. Given that, mutual funds prove to be an ideal investment option for many beginners who are willing to start their wealth creation journey.

Thanks to technology, tech-savvy investors (millennials and Gen Z) prefer to buy mutual funds online via various fintech apps and web portals. Investment in mutual funds may seem complicated at first for many novice investors, with several categories of mutual funds and schemes focusing on various asset classes, sectors/themes. Once you explore the options available under mutual funds, you can accordingly select worthy schemes as per your suitability. Since there is no one-size-fits-all rule when it comes to investment strategies, all investors, especially beginners, should evaluate their risk profile, investment horizon, and financial goals before investing in the best mutual funds.

However, it is noteworthy that you acquaint yourself with the basics surrounding mutual funds, this way, you will be able to make informed decisions while selecting the best mutual funds. Beginners in mutual funds consider selecting schemes by browsing the internet, and some may also consult their friends or relatives. Bear in mind that you should invest in schemes whose investment objectives and risk levels are in sync with your risk profile and financial goals. Do not randomly pick the best mutual funds or blindly rely on the advice of a relative or a friend.

A common mistake beginners in mutual funds could make is investing in mutual funds based only on their past returns. You need to assess various qualitative and quantitative factors to invest in the best mutual funds. Instead of following short-term trends, you should choose funds that have consistently performed well over the long term.

When speaking from the investment objective, there is a wide range of lucrative categories of mutual fund schemes that young investors and beginners can consider to generate optimal returns. This article elucidates the various types of best mutual funds for beginners.

You see, historically, investment in equities is known to offer significant returns in the long-term, and Equity-oriented mutual funds make it easy for novice investors to start investing right away in a diverse portfolio and begin their journey towards wealth creation.

1. Large-cap Mutual Funds –

Large-cap funds invest in stocks of companies which are in the top 100 companies by market capitalisation and stock market evaluation. Since these funds are stable and carry a relatively lower risk, it is a good investment choice for beginners who have just started learning about the market. Large-cap funds invest at least 80% of their corpus in high-quality blue-chip companies and are capable of offering decent returns. These funds offer stability to your portfolio during volatile market conditions.

Here’s a list of the top 3 Large-cap Mutual Funds for beginners:

Data as on August 30, 2022
(Source: ACE MF)  

Passive investing is the simplest form of investing. It may also be called rule-based investing, where there is no human intervention. Most passively managed funds in India are based on broad market indices, which simply put together a bunch of companies based on their market cap size and then weight them using free float market capitalisation.

Investing in passively managed funds is less cumbersome as compared to investing in actively managed funds. Also, they carry with them a low expense ratio along with a low risk (as compared to actively managed mutual funds), making market timing irrelevant, and low portfolio churning also adds to their merit. Passive mutual funds are a good option for first-time investors and those looking for long-term investment options.

2. Index Funds or ETFs –

Index Funds and Exchange-traded Funds (ETFs) are the two vehicles that drive the passive investing options for beginners. These funds are designed to mirror market indices like the Nifty 50 index or the S&P BSE 500, or any other specific index and provide investors with exposure to a diversified fund across sectors. These are passively managed funds that allocate the majority of its asset to the units as per the underlying index and merely replicate the underlying index’s performance while limiting fund managers’ intervention. For those new to mutual funds, this provides decent returns at a low cost and reduces the stock-selection risk.

3. Fund of Funds Schemes –

This is also a great investment medium for beginners in mutual funds who don’t have expertise in selecting the right equity funds. ‘Fund of Funds’ (FOF) are designed to passively invest in other mutual fund schemes rather than investing directly in stocks, bonds or other securities.

Fund of Funds offers a portfolio of equity funds picked by professional fund managers and their team, who even track it closely and take timely entry and exit calls without worrying about the tax implications. Investing in different mutual funds, which in turn invests in different underlying asset or asset subclass, offers the benefit of diversification and reduces the risk.

Many of you also seek for tax saving options, and mutual funds offer tax-saving schemes which help you avail tax deductions of up to Rs 1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961. These mutual fund schemes are called Equity-linked Savings Scheme (ELSS).

4. Equity Linked Savings Scheme (ELSS) –

ELSS is similar to any other diversified equity mutual fund except that it comes with a 3-year lock-in period and tax advantage. ELSS funds are an excellent option for salaried individuals starting their investment journey and looking to save some tax. These funds have the potential of giving a higher rate of returns compared to other tax-saving options under 80C like NPS, PPF etc.

Here’s a list of the top 3 ELSS mutual funds for beginners:

Data as on August 30, 2022
(Source: ACE MF)  

In addition to equity funds, hybrid funds are a kind of mutual funds that invest in two or more asset classes, primarily equity and debt. Despite the fact that there are many varieties of hybrid funds, beginners should consider Multi-asset Funds.

5. Multi-asset Allocation Funds –

No two asset classes perform in the same direction simultaneously in a market phase. Multi-asset Allocation Funds are a type of mutual fund that invest across different asset classes like equity, debt, and gold. The rationale behind using different asset classes rides on the fact that each asset behaves differently during various market phases.

Thus, these funds provide a dynamic asset allocation as per the prevailing market conditions to gain steady returns. Diversification helps in lowering risks that come with investing in a single asset class as compared to pure equity funds. The Multi-asset Allocation Funds are suitable for new investors who have a low-risk appetite but seek steady returns on their investments.

Here’s a list of the top 3 Multi-asset Allocation Mutual Funds for beginners:

Data as on August 30, 2022
(Source: ACE MF)  

To conclude…

Mutual funds are one of the ideal investment instruments for wealth creation, tax savings and achieving envisioned financial goals. Mutual funds are now a more convenient option for beginners with ease of access due to fintech investing apps or portals and automated online SIP investments.

According to experts, investment in mutual funds should contain a ‘time in the market’ approach instead of ‘timing the market’. A gradual long-term approach towards investing in the best mutual funds as per your suitability can work well and is the best way to begin your investment journey in any market condition. Properly managing your investments and making worthy financial decisions takes time, skill, and ongoing effort; it is not a one-time thing. Many novice or young investors, lack adequate financial knowledge and make decisions based on random market information they receive without analysing the actual market scenario.

Therefore, it is prudent to work on enhancing your financial knowledge to draw up worthy investment decisions and create a robust portfolio of best mutual funds that would be able to provide significant returns in the long run and across various market cycles.

Happy Investing!

This article first appeared on PersonalFN here