Useful, simple to understand and easy to execute. These should be the qualities of your first mutual fund. For beginner investors, this is generally best satisfied by tax-saving funds or balanced funds.
Here's why. When you start investing in mutual funds, it makes sense to opt for a fund that invests mostly in equity. The reason for this is that you are likely to have no equity investments at all. New investors generally have bank deposits, the PPF and other fixed-income investments. Since equity is the best type of long-term investment, and since mutual funds are the easiest and safest way to invest in equity, it follows that the type of fund you should choose must be an equity fund.
There are two types of funds that are uniquely suitable as beginner funds. These are Tax Saving Funds and Balanced Funds.
Tax Saving Funds: Tax saving funds or Equity-Linked Savings Schemes (ELSS) are basically all-equity funds in which investments are eligible for tax exemption under Section 80C of the Income Tax Act. Under Section 80C, you can invest up to R1.5 lakh in a set of instruments, one of which is ELSS funds. Since they are equity funds, you should invest in them for the long term. In the case of ELSS funds, this long-term imperative is enforced under tax laws through a three-year lock-in. As a result, investors tend to have a good experience as they receive reasonable returns from these funds. Moreover, the tax-break acts as a natural boost to returns.
Balanced Funds: Balanced funds, also called hybrid funds, combine equity and debt investments in a certain ratio. In order to maintain this ratio, the fund manager will typically disinvest from holdings that have gained more and invest in holdings that have gained less. This of course is asset rebalancing.
Effectively, gains that are made in equity are protected by debt. The great advantage of balanced funds is that they are inherently safer than pure equity funds. They gain well when the markets gain but when the markets fall, they fall less sharply, thus protecting gains that were made in better times.
To sum it up, your experience with your first fund will in many ways set the course for how you invest. This is why you do not want to overcomplicate the decision. Keep things simple by going for an equity mutual fund that will help you realise higher returns. To realise tax savings from your investment, opt for an ELSS fund. Finally, think long term.