Best mutual funds for beginners: Your first equity investment! | Value Research Investing in mutual funds for beginners: Equity investing is the foundation for creating wealth. Mutual funds provide a convenient solution for the same. Read to know which mutual funds are best for beginners and more.

Your first equity investment!

Equity investing is the foundation for creating wealth. Mutual funds provide a convenient solution for the same.

Equity, as an asset class, has been able to beat inflation in the long-term. It is the only asset class that can generate inflation-beating returns, which in turn helps you preserve the value of your savings. This is why one should invest in equities.

Mutual funds greatly simplify the task of investing in equities. They reduce your risk by diversifying your portfolio. Alternatively, direct stock investing can be very overwhelming for beginners. They need to know what stocks to buy, when to buy, when to sell, etc. With mutual funds, you can take the help of an expert. So, it is highly desirable to start your equity investment with mutual funds.

Now, let's say you've decided to invest in mutual funds and wondering, 'Where should I begin? Which fund should I choose?' Well, here is some help to get started with your first mutual fund investment.

Using a perfect analogy, a baby doesn't start running the very first time. It takes small steps and tries to understand the environment. Only after does it get comfortable and acquires the ability, then it starts walking and eventually runs. Similarly, if you're a first-time investor, rather than looking out for the best-performing fund, look out for schemes that have low risk and provide a decent amount of return. Once you know the map, you can go ahead with other investments over time. There are two specific types of funds that are suitable for a beginner.

The first one is aggressive hybrid funds. These funds invest about 65 per cent in equities and 35 per cent in debt. Debt instruments are fixed income securities such as bonds (bonds can be issued by a company or the government and they carry a fixed interest. The principal is returned on a specified date). They earn a fixed income and don't depend on the stock market. The advantage of these kinds of funds is that their debt component helps to contain the equity volatility from completely affecting the returns. Irrespective of how the equity markets perform, they are better placed to provide a decent amount of return. Softening the risk is what is necessary for new investors so that they are psychologically strong to stay the course and do not end up exiting the fund in panic.

The second would be tax saving funds. They are also called the equity-linked savings scheme or ELSS. These funds are for those who are looking for a tax advantage. They are pure equity funds where the majority of the funds' assets are invested in large-cap stocks. You are eligible for a tax exemption under section 80C of the Income Tax Act if you invest in these funds. You can claim a tax deduction of up to Rs 1.5 lakh in a financial year. One caveat of this scheme is that there is a lock-in period of three years. This means that once invested, you can only take your money out after three years. This works as an advantage for new investors who can't handle the market volatility and also helps one have a long-term view which is the holy grail of equity investing.

For other queries related to mutual funds investing, visit Get Started, our specially curated page for new investors like you.

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