First time investor in mutual funds - Why, what and how?

You have been watching your friends / colleagues investing in mutual funds / stocks. You also realise that you need to plan for a better financial future. Not only to account for higher aspirations but also to meet your other financial goals.

All this while your preferred investments have been fixed income products such as PPF, Bank FDs, etc. However, the returns from them (specially after taxes) may not be enough to reach your long term financial goals.

As things appear, gold is losing its sheen and real estate too is finally toning down its ‘unreal’ expectations.

The one asset that has the potential to generate a better inflation-adjusted return and grow your wealth is equity.

You have started to realise this. So, you have gathered the courage to take the dip, that is, invest in a mutual fund.

However, as a first time investor you are slightly scared. There are doubts lurking in your mind.

Will my money be safe?
How do I choose the right fund?
What is the best way to make the first investment?

All are valid concerns. Let us try and address them. We will also point you to additional reading to prepare yourself to invest in mutual funds.

#1 Safety concerns for the first time investor

By safe you mean – “Is someone going to run away with my money?” Unlikely. Mutual Funds are regulated by the SEBI and are quite transparent in terms of where the investments are made, what do they charge as fees, etc.

If you mean – “Can I lose all my money?”, the simple answer is yes, you can. It can happen when you make a wrong fund choice. The best way to avoid this situation is to choose the right fund and monitor it on a regular basis.

Then there is the volatility aspect. In the short term, that is upto 5 years, the value of your investment can go up and down, sometimes dramatically. However, if your fund selection is right and you stick through these ups and downs, you are likely to see an inflation adjusted reasonable return on your investment.

Read more: 21 facts about mutual funds

#2 Right fund for the first time investors

For choosing the right fund, you need to look beyond just the latest performance numbers.The right thing to focus on is what the fund intends to do – its mandate. You have to go beyond star ratings or rankings. These ratings are more focused on performance and can change a lot.

You should prefer to go with a fund that is consistently managed and delivers on the mandate, even if there are small periods of non performance.

As far as choosing your first fund is concerned, you are likely to be in one of the following 3 situations:

Scenario 1 – You have extra cash in your bank which you want to deploy for getting a better return than the savings/current account. Your option is to invest in liquid funds or ultra short term funds. These funds are good for short term parking of surplus. Click on the links above to read more.

Scenario 2 – You want to save tax on your income/salary. Tax saving mutual funds offer a good alternative to not only save tax but also invest in equity. Here’s more on tax saving mutual funds. Please don’t buy a ULIP for your tax saving.

Scenario 3 – Your purpose is to invest in equity but a low risk mutual fund (tax saving not important). One of the first investments in this category for a beginner is a hybrid equity fund. It invests in debt – around 25 to 30%, as well as equity – around 70 – 75%.

The hybrid fund brings to you the best of both the worlds, that is equity and debt investments in a single package. The presence of debt also lowers the risk profile of the fund and leads to automatic reallocation of the investments from one to the other. Read more about these hybrid funds here.

As a first time investor – you can also look for details on any fund scheme using the Mutual Know your Mutual Fund.

#3 How to invest

For making your first investment, there are multiple options you can choose from.

Go directly to the mutual fund and invest – online or offline.
Go to one of the registrars such as CAMS or Karvy and invest through them – online or offline.
Use online platforms such as Unovest which helps you invest in direct plans of mutual funds.

We hope your first investment in a mutual fund is easier now.

Still find it confusing?

As a first time investor, if you still find it all confusing, you would be better off taking advice from an investment adviser and invest in direct plans of mutual funds.

Do share your queries and concerns and we would be wiling to help you.