Selecting a mutual fund as your first investment can be a daunting task, but understanding your objectives and risk tolerance is half the battle. Before investing, it’s essential to identify your goals for the investment. Are you looking for long-term capital gains, or is current income more important? Will the money be used to pay for college expenses or fund a retirement decades away?
Understanding Your Risk Tolerance
Your personal risk tolerance is a crucial factor in choosing the right mutual fund. Are you comfortable with the possibility of short-term market fluctuations, or do you prefer a more conservative approach? Depending on your personal investment profile, some mutual funds will be a better fit for you than others.
Types of Mutual Funds
There are many different types of mutual funds available, each with its own investment strategy and risk level. For beginners, it’s essential to understand the different types of funds and how they can help you achieve your investment goals.
Index Funds vs. Actively Managed Funds
One of the most significant decisions you’ll make is whether to choose an index fund or an actively managed fund. Index funds track a specific market index, such as the S&P 500, and offer broad diversification and low fees. Actively managed funds, on the other hand, are managed by professionals who research and select individual securities with the goal of beating the market.
Why Index Funds are a Good Starting Point
For beginners, index funds are often a good starting point. They offer broad diversification, low fees, and a low-risk approach to investing. Additionally, index funds have historically outperformed actively managed funds over the long term.
Popular Index Funds for Beginners
Some popular index funds for beginners include:
- Vanguard Total Stock Market Index Fund (VTSAX)
- Schwab U.S. Broad Market ETF (SCHB)
- iShares Core S&P Total US Stock Market ETF (ITOT)
It’s often the “first” things we do in life that shape how we think about things. If you had a good time on your first date, you’d have a good feeling about the future. Unless it was good, you won’t be excited. With mutual funds, too, it is the same thing. This is a good time to start investing in Mutual Funds because it can make or break your belief that it’s a good idea. Thus, it is very important to think very carefully about your first fund.
Here, we’ll talk about why the first fund is important and which funds are best for new investors to start with.
Choose your first fund wisely because it’s important.
As a general rule, a first-time investor is someone who has their money in bank deposits, PPFs, or other safe places. They are willing to invest in mutual funds because they want to make more money than they would with traditional fixed-income instruments. Most people who start investing for the first time go for equity mutual funds because they hope that they will make more money.
Some equity mutual funds aren’t right for you, as a new investor, because you’re not sure what to do. It’s not all safe. There are some that are high risk, such as sectoral funds. By picking one of these funds as your first fund, you can change how you think about mutual funds. You might not want to buy them again. In fact, if you choose the right fund, you will fall in love with this way of investing.
What should your first fund have?
Your first fund should be easy to understand. There are a lot of risks when you have an exotic investment mandate. If it’s too complicated, you might not understand the risks and have bad luck. For now, keep things simple.
The first thing you do when you start investing is to be skeptical and nervous about what you are going to do. You have a Diversified Portfolio because you are a new investor. There’s a risk in mutual funds, and it shows up in this nervousness. However, these risks are not in the hands of the person who is investing. So you can’t get rid of these risks; you can only cut down on them or make them less likely.
One way to lessen the risk of something going wrong is to diversify. Your first fund should be one that gives you enough diversification, which means it should have a lot of different stocks from different sectors and maybe even different types of assets. This way, when the market goes down, some of the stocks in your portfolio might lose money. Other stocks from different sectors or investments in different asset classes will help you keep your portfolio’s returns stable, though.
There is a different risk profile for each mutual fund. Is it in line with your risk profile? For example, sectoral funds are riskier than multi-cap funds. It’s less risky for a fund’s portfolio to have a lot of different things in it. For your first investment, you should invest in funds that aren’t very risky. This way, you won’t be discouraged from investing in mutual funds in the future.
Which Fund should you start with?
With this in mind, we think there are two types of funds that you can choose from as your first funds. Check out these things:
ELSS money:
A type of equity scheme called an “Equity Linked Savings Scheme” (ELSS) can help people save money on taxes because of Section 80C of the Income Tax Act. In order to lower your taxable income by Rs. 1.5 lakh, you can invest in ELSS. This means that you can save up to 46,800 in taxes each year by doing this. It takes three years to get out of these equity funds. This means that you can’t get your money back for three years after you put it in. Mandatory lock-in is a great thing because it forces you to invest for a long time. With equity investing, the more time you have, the more likely you are to make good returns.
This isn’t all: These funds are also multi-cap funds, which means that they have a wide range of stocks in their portfolio, from large-cap to small-cap and across different industries. Even though you’ll save money on taxes, it also gives you a well-balanced portfolio, which lowers the risk and helps you make good long-term money.
Aggressive Hybrid Funds (also known as Balanced Funds): These funds are more likely to make money than other types of funds.
You can think of them as aggressive hybrid funds, which are hybrid mutual funds that invest in both stocks and bonds. 65% to 80% of their assets are invested in equities, like stocks. The rest of their money is invested in debt, like bonds. By investing in two different types of assets, they give you a wide range of options.
The fund manager keeps changing the portfolio based on how the market is going. In the same way, they keep rebalancing by selling off the investments in the portfolio that have done well and bringing the fund’s portfolio back to the ideal ratio that it usually has. People who own both equity and debt have a good risk-reward balance because of this. From a new investor’s point of view, an aggressive fund is a good choice because they make money when the market rises, and when the market falls, they fall less sharply because the debt component protects the equity.
There are different types of equity mutual funds, but what is one of them?
An equity mutual fund is a professional-managed, pooled investment vehicle that is mostly made up of stocks. Depending on the strategy used by the mutual fund, it may own stocks from companies all over the world, or it may only be able to invest in companies in the United States. There are two types of equity mutual funds: active and passive (index-based). The fund’s management team decides which one to use. These mutual funds can be very different in how they invest, with some allowing companies of all types and sizes, while others might only invest in companies that have certain characteristics. An equity mutual fund can have anywhere from 20 to over a thousand stocks in it. There are a lot of things that can change this number.
Why would you want to have an equity mutual fund in your money?
It’s better to invest in equity mutual funds rather than own just one stock. This way, you can choose a lot of different companies to invest in. This diversification may help to lessen the risk that comes with owning a certain stock. In addition, equity mutual funds let investors get into specific markets or styles so that they can build more complete portfolios to help them meet their goals, too.
Diversification of a portfolio
Equity mutual funds don’t have a lot of money invested in one stock, which means that investors don’t have to worry about concentration risk.
Professionally run
Mutual funds are run by professionals who do research on investments and make many of the decisions that an investor might not be able to make on a daily basis.
The breadth of what you make?
It is one of the most common types of mutual funds. One of them is equity mutual funds. It’s because of this that there are a lot of different types and options to choose from. Investors are more likely to find a product that fits their needs.
External Influence
It can be bad for businesses in a market when outside factors (culture, government, economy, resources, etc.) change. This can hurt all of the businesses in the market. This could make the mutual fund more volatile.
Customization is limited.
Investors can’t change the equity mutual fund portfolios they own to meet their own needs by adding or removing certain securities. These decisions are made only by the management teams, not you.
There is a mutual fund for people who owe money, called
It’s called a debt mutual fund or a “fixed-income fund.” It invests a lot of your money in fixed-income securities like government bonds, debentures, corporate bonds, and other money market instruments. Debt mutual funds lower the risk for investors a lot by investing money in things like this. This is a way to make money that isn’t as risky as other investments.
Investing in debt funds can be good for you.
Income that is steady
Debt funds have the potential to make money over time. As with equity funds, debt funds are less risky than equity funds, but they don’t always pay off, and there are risks in the market.
In this case, the tax system should be more efficient.
Many people invest money in order to cut down on their annual tax bill. So, if you want to cut your taxes, you might think about investing in debt mutual funds. This is because debt funds are more tax-friendly than other types of investments, like fixed deposits (FDs).
Taxes are paid on the interest you earn on your investments in FDs each year, no matter if the maturity date is this year or later. It doesn’t matter if the maturity date is in that year or later, though. The tax you pay on debt funds is only due when you redeem them, not before that. You also pay taxes on the money you get when you sell your home, even if it’s only a part of it. If you keep your mutual fund units for less than three years, you pay Short Term Capital Gains (STCG) tax. If you keep them for more than three years, you pay Long-Term Capital Gains (LTCG). People who make long-term capital gains (LTCG) can get indexation benefits, which means they only have to pay taxes on the money they make that is higher than the inflation rate. This is called the cost inflation index (CII). This helps you pay fewer taxes and get more money back after taxes.
People who have a lot of money
They have a set amount of time that they have to stay there. If you close your FD early, the lender may charge you a fee. When you buy debt mutual funds, there are no lock-in periods. Some of the funds have an exit load, which is a charge that is taken out of your money when you take money out of them early. Exit fees vary from fund to fund, and some have no exit fees. If you want to get your money out of a debt mutual fund, however, you can do so at any time on any business day.
Stability
Investing in debt funds can also improve the balance of your portfolio, which can help you make more money. Equity funds, which have a higher chance of making money, can be risky. These funds are linked to the performance of the stock market. At the same time, debt funds can help you diversify your portfolio and reduce the risk of your whole investment portfolio at the same time (cushioning the downside).
Flexibility
If you want to move your money around, debt mutual funds let you do that, as well. This can be done with a Transfer Plan (STP). Here, you can invest a large sum of money in debt funds and then move a small amount of money into equity funds at regular intervals. As a result, you don’t have to put all of your money into stocks at once. You can spread the risk over a period of a few months. Other traditional investment options don’t give investors this kind of control over how their money is spent.
The Bottom Line:
The first fund’s decision is very important, and you need to pay attention to it. It can either make you believe that investing is a good idea or even break it down. You should choose a fund that is easy to understand and simple to do. This is what you should do. Check to see if the fund’s risk profile is in line with your own and if it has enough money to protect you from bad times. Also, invest in funds that can help you achieve your long-term goals, like stocks and bonds.
Conclusion
Choosing your first mutual fund is an important decision that requires careful consideration of your objectives, risk tolerance, and investment goals. By understanding the different types of mutual funds and their investment strategies, you can make an informed decision and set yourself up for long-term success. Remember, it’s essential to start with a solid foundation and gradually build your portfolio over time.