What are the best mutual funds for first-time investors?
This article shows new investors’ steps to choosing their first mutual fund.
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.
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.Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.
New investors must complete mutual fund KYC before investing in mutual funds. This KYC process is of two types:
To complete KYC, either
Once KYC is complete, you can invest in Mutual funds by either:
Once the operational step above is complete, we then move into the meat of the matter.
We are not asking, “why are you planning to invest in mutual funds”. The question is more general. There are many reasons to invest:
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.
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.
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.
Set a goal before looking for what to invest in
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.
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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
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 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?
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?
First-time investors who have yet to experience market volatility in either equities or debt markets due to rising interest rates require careful handholding 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.
How to invest a lump sum amount for your goals?
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.
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.
Investors should choose between 1-2 passive equity funds which track large-cap indices like the Nifty 50 or Sensex.
These articles will help:
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?
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1. Email me with any questions.2. Use our goal-based investing template to prepare a financial plan for yourself
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Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled What are the best mutual funds for first-time investors? first appeared on 18 Jan 2023 at https://arthgyaan.com