Mutual Funds for Beginners | How to pick your first mutual fund | Investment Tips Picking the right mutual fund for your first investment can get confusing. But it doesn't have to this way. In this video, we tell you about how to go about selecting your first fund. You will see what the ideal categories for investment horizons ranging from 1 day to 7+ years.
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So, how should you choose your first fund?
1. Funds for investments up to 1 year
If you are investing for say, 1 week to 1 year, you have to stick to Debt Schemes.
And specifically, don’t go beyond these 5 categories -
Overnight Funds - when your horizon is for up to 1 week.
Liquid Funds - When you are looking to invest for 1 week to 1 month
Ultra Short Duration: for 1 to 3-month investment
Low Duration Funds: for 3 to 6 month investment and
Money Market Funds: for your investment that you can do for 6 months to 1 year
All these Scheme Categories are a far better alternatives for the same duration’s FDs that you would get in a bank.
2. Funds for 1-2 year investment horizon
For this investment duration too, you should stick to Debt Funds.
Short Term Debt Funds can be a good category for this
These funds mostly lend to good companies for a period of 1 to 3 years.
They tend to deliver much better returns than Bank Fixed Deposits
if you complete 3 years as you would pay far lower effective tax on your returns than what you pay on the interest you receive on FDs.
3. Funds for 2-3 year investment horizon
From debt funds, you can go for Banking and PSU Debt Funds
These funds lend only to banks and public sector companies
These companies have good credit rating & hence the risk is controlled even if money is lent for a couple of years or more.
Hybrid Scheme category that suits a 2-3 year horizon is Equity Savings Funds
These funds put around 30-35% in stocks, 30-35% in equity securities that offer arbitrage opportunities, while the remaining is invested in debt.
Equity offers growth potential while debt adds stability.
The arbitrage part is more or less risk-free as it buys and sells the stock at the same time to take advantage of different prices of the same stocks in different markets.
4. Funds for 3-4-year investment duration
ELSS Funds
If you can lock-in your money for 3 years, you should go for ELSS funds.
These funds have an added advantage of helping you save up to Rs. 46,800 in taxes every year, plus you get the growth potential of equities.
Dynamic Asset Allocation Funds
These are hybrid funds buy stocks at low prices & sell automatically when the prices rise.
These funds keep changing the allocation to stocks & debt to generate optimal return & minimize risk.
Funds for 4-5 year investment duration
Aggressive Hybrid Equity Funds -
If you want to control risk, go for Aggressive Hybrid Equity Funds.
They invest 65% -80% of your money into equity and 20%-35% of the money in debt.
This is the ideal category for long-term investments for every first-time investor.
Large-Cap funds
Another category for your 4-5 year horizon is Large Cap Equity Mutual Funds.
They invest in the Top 100 companies, some of whom are most loved brands like, HDFC Bank, SBI, Hindustan Unilever or Reliance Industries, etc.
These funds provide relatively stable returns and are not as volatile as other equity fund categories.
Multi cap funds
A slightly aggressive cousin of Large Cap Mutual Funds, they follow a Diversified Portfolio strategy that gives your money exposure in companies of all sizes, across sectors.
Funds for 5-7 year investment duration
Large and Mid cap
These funds invest in a combination of India's biggest and India's fastest-growing mid-sized companies, giving you a mix of growth and stability.
Mid Cap Funds
These funds invest in mid-sized companies in India. The companies in this space are some of the fastest-growing companies.
For this reason, you can get market-beating returns.
However, they can be volatile in the short to medium duration
Funds for 7+ year investment horizon
Small Cap Funds
These funds invest in the smallest companies in India
These companies have the potential to become mid and even large companies in the future and can give outstanding returns in this journey. However, this space is extremely volatile, so you need to be prepared.
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