This article shows new investors’ steps to choosing their first mutual fund.

Disclaimer: This article does not provide any fund names for the investor but provides the framework that investors could follow to shortlist funds on their own.

📚 Table of Contents

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• Why should first-time investors invest in mutual funds?
• Step-by-step process before starting to invest
  • Step 0: Complete KYC and choose an investment platform.
  • Step 1: Why are you planning to invest?
  • Step 2: When do you want to spend the money?
  • Step 3: How much money do you plan or need to spend?
• Fund choices for investors as per age
  • Investors in their 20s
  • Investors in their 30s
  • Investors in their 40s
  • Investors in their 50s
  • Investor in their 60s and onwards
• Investing a lump-sum amount into mutual funds for first-timers
• Which funds should be chosen without any concrete plan?
• Choosing suitable mutual funds
  • Choosing the equity mutual fund
  • Choosing the debt mutual fund

Why should first-time investors invest in mutual funds?

First-time investors in this article are new to mutual funds as an investment option. Mutual funds allow first-time investors to access professional money managers across asset classes like equity and debt or even real estate at low cost. Also, mutual funds are SEBI regulated, can be chosen without much research via a competent advisor and allow investing via amounts as small as Rs. 500/month.

Mutual funds are also more tax-efficient compared to FDs: Mutual Fund vs Fixed Deposit - where should you invest? while without equity, you need to invest a lot more to reach the same goal: How conservative investors risk falling short of their goals.

Step-by-step process before starting to invest

Step 0: Complete KYC and choose an investment platform.

New investors must complete mutual fund KYC before investing in mutual funds. This KYC process is of two types:

• Aadhaar based eKYC which restricts investment per PAN to ₹50,000/year
• Full KYC with In Person Verification (IPV) either in offline mode or online via video call

To complete KYC, either

• visit your nearest CAMs office with all the required documents
• perform online KYC with video call from supported investment platforms

Once KYC is complete, you can invest in Mutual funds by either:

• Creating an account with the AMC website
• Use an RTA operated or Bank/AMC owned platform like MFUtilities or MFCentral

Once the operational step above is complete, we then move into the meat of the matter.

Step 1: Why are you planning to invest?

We are not asking, “why are you planning to invest in mutual funds”. The question is more general. There are many reasons to invest:

• generate wealth
• beat inflation
• invest for retirement at 60
• retire early at 40-45
• sending children to college
• buying houses
• buying cars
• recurring vacations
• and so on

Step 2: When do you want to spend the money?

Once you have the reason for investing, you need to understand when you need the money: soon, around 5 years from now, 10-15-20 years from now? Or longer than that? Maybe you need it regularly like vacation planning. Or you are not sure about the date.

Step 3: How much money do you plan or need to spend?

The amount of money to be spent is the target corpus. It is a critical input since we must chase that as a target throughout the investment period.

We have covered the concept of chasing the target corpus, instead of fund returns, here: Why you should track your target goal corpus instead of returns

Ultimately your investment objective will be to:

At the end, you need to have the corpus ready for spending on the day you need to spend it.

These three steps have been discussed in more detail here: How to set SMART goals for investing?

With this background, we will now look at various investor categories per age and then discuss the mutual funds suitable for them.

Fund choices for investors as per age

Once goals are known, we will determine an approximate Asset Allocation for the complete portfolio and invest into equity and debt asset classes via mutual funds.

Investors in their 20s

Investors in their 20s who have just started earning should focus on long-term wealth creation after paying off any student loans. Short-term goals include vehicle/house purchase and marriage (self/siblings). The compulsory long-term goal of retirement is always there.

The simplest solution here is to invest in two mutual funds in a 60:40 proportion: one equity index fund and one debt fund. The debt fund will fund short-term goals (car/house purchase), while the equity allocation will be for retirement/FIRE goals.

Investors in their 30s

Investors in their 30s usually have to save for a house downpayment as a new goal they would not typically have earlier. Also, new parents will start thinking about their children’s education and marriage goals.

At this point, it is best to use a proper goal-based investing calculator to determine the correct asset allocation for all of these goals and the omnipresent retirement goal. Investors should keep things simple by choosing a minimal set of funds that take care of all the goals together.

Here is a worked out case-study for this situation: Case study: how this double income recently married family can perform DIY goal-based investment planning

Investors in their 40s

At this point, children’s education and retirement (early or otherwise) will be the most important goals for most investors. Children’s goals will be due in a few years, while retirement will be more long-term. Here is a related article: I am 45 years old and have not invested before. How do I start now?

Investors in their 50s

Investors in their 50s usually have their children’s education goals in place, the house mostly paid off, and some retirement corpus has already been accumulated. Therefore, this age is the point of correcting the asset allocation and accelerating investments into the retirement goal by ensuring adequate equity allocation. We have discussed this point here: How much equity should you have in your retirement portfolio?

Investor in their 60s and onwards

Investors in their 60s who are already retired need to implement the bucket portfolio for their retirement planning. They can implement the bucket portfolio quickly with a high degree of tax efficiency via mutual funds: How to plan for retirement using the bucket approach?

Investing a lump-sum amount into mutual funds for first-timers

First-time investors who have yet to experience market volatility in either equities or debt markets due to rising interest rates require careful hand holding and guidance in investing their large corpus into mutual funds for the first time. Investors can implement the standard mental model of a 6-12 month SWP from a debt fund into equity to reach the correct asset allocation of the portfolio.

Which funds should be chosen without any concrete plan?

A reader asks:

Going to plan a SIP of 10k per month in account of my wife and son (5k each). Any specific mutual fund to choose?

In situations like this, a simple thing to do is to simply make a 50:50 equity and debt portfolio that is good enough to get started with investing. In the case above, 2500 per investor per month should go into one equity fund and one debt fund. The same funds can be chosen in the case above. There is nothing wrong, or materially different in case two different AMCs are chosen.

Choosing suitable mutual funds

In every age bracket above, we have discussed investing in equity and debt as asset classes and focused on getting the allocation correct using a calculator (this or this). If you re-read the age-wise sections above, we have spoken about investing x% in equity and 100-x % in debt in each of the cases. New investors should be relieved to know that 90% of the hard work is now complete. We only need to complete the relatively trivial, relative to the work completed so far, task of choosing suitable equity and debt mutual funds.

Choosing the equity mutual fund

Investors should choose between 1-2 passive equity funds which track large-cap indices like the Nifty 50 or Sensex.

These articles will help:

• What are the best index funds for new investors in India?
• Which index funds to invest in and why?

Choosing the debt mutual fund

Debt mutual funds should belong to the same AMC as the equity mutual funds chosen above. This rule makes rebalancing a simple one-click job: Portfolio rebalancing during goal-based investing: why, when and how?.

This framework will help you choose a debt mutual fund: How to choose a debt mutual fund?

There is minimal benefit in choosing a large number of funds for your goals though a bit of AMC diversification should be practised: Do you need multiple mutual funds to keep your money safe?