Best Mutual Funds for Beginners

May 15, 2024 / Reading Time: Approx. 10 mins

Listen to Best Mutual Funds for Beginners

00:00 00:00

Best Mutual Funds for Beginners

Editor’s note: This article is updated with latest mutual funds data as of April 30, 2024

Many of you keep looking for effective ways and alternatives to invest your hard-earned money wisely. While there are numerous investing options accessible today, mutual funds have emerged as a mainstream investment option for many individuals, especially the millennial generation.

In the ever-evolving landscape of investing, mutual funds have solidified their position as the most popular choice for investors. This dominance can be attributed to a confluence of factors, including increased accessibility, diversification benefits, professional management, and a strong track record of growth.

The traditional image of investing involved hefty minimums and a need for in-depth financial knowledge. However, mutual funds have revolutionised this paradigm, and they offer a level of accessibility unmatched by many other investment options.

With low minimum investment amounts, they make the stock market a viable option even for those with limited capital and even small sums of money can be put into work. This empowers a wider audience, particularly those new to investing, to participate in the market and build wealth over time.

[Read: Is Your Mutual Fund KYC Status 'On Hold'? Here's Good News]

One of the core strengths of mutual funds is their inherent diversification, which helps mitigate risk. If one stock in the basket performs poorly, the impact is lessened by the positive performance of others. The 'don't put all your eggs in one basket' approach is a cornerstone of sound investing, and mutual funds make it readily available.

Investing requires research, analysis, and a deep understanding of market trends. For many individuals, this level of expertise can be daunting. Mutual funds address this by offering professional management. Investors benefit from the fund manager's knowledge, saving them significant time and effort. Additionally, fund managers constantly monitor the market and adjust the portfolio as needed, providing a level of active oversight that individual investors may struggle to replicate.

The rise of online investing platforms has significantly streamlined the process of buying and managing mutual funds. Investors can now research different funds, compare fees, and make transactions directly from their computers or smartphones. This convenience factor, coupled with user-friendly interfaces and educational resources offered by many platforms, has removed barriers to entry and democratised investing for a broader audience.

[Read: A Slew of New Fund Offers in 2024 - Time to Take a Deep Look]

How to Begin Investing in Mutual Funds?

Investment in mutual funds may seem complicated at first for many novice investors, with several categories of mutual funds and schemes focusing on various asset classes, sectors/themes. Once you explore the options available under mutual funds, you can accordingly select worthy schemes as per your suitability.

Since there is no one-size-fits-all rule when it comes to investment strategies, all investors, especially beginners, should evaluate their risk profile, investment horizon, and financial goals before investing in the best mutual funds.

However, it is noteworthy that you acquaint yourself with the basics surrounding mutual funds; this way, you will be able to make informed decisions while selecting the best mutual funds. Beginners in mutual funds consider selecting schemes by browsing the internet, and some may also consult their friends or relatives.

[Read: Key Investment Risks to Watch Out for in 2024]

Bear in mind that you should invest in schemes whose investment objectives and risk levels are in sync with your risk profile and financial goals. Do not randomly pick the best mutual funds or blindly rely on the advice of a relative, colleague or friend.

The Rise of the Mutual Fund: A Dominant Force in 2024 Investing

The mutual fund universe isn't monolithic. A vast array of options caters to various investment goals and risk tolerances. Investors seeking aggressive growth can opt for sector-specific funds that focus on high-growth industries like technology or healthcare.

[Read: How To Approach Equity Mutual Funds Amid General Elections in India]

Conversely, those prioritising income may choose bond funds that generate regular interest payments. There are also balanced funds that marry stocks and bonds, offering a balance between growth potential and income generation. This flexibility allows investors to build a portfolio that aligns with their needs and risk appetite.

The mutual fund industry is constantly evolving. Socially Responsible Investing (SRI) funds, which focus on companies with strong environmental, social, and governance (ESG) practices, are gaining traction. Additionally, the rise of thematic funds that invest in specific trends like clean energy or artificial intelligence caters to investors with a particular interest in these areas.

The recent surge in the performance of mid-cap and small-cap stocks in India has undoubtedly played a significant role in propelling mutual funds, particularly those focused on these segments, into the spotlight for investors in 2024. The impressive gains delivered by mid-cap and small-cap stocks have captured the attention of investors seeking high growth potential.

The mid-cap and small-cap rally has undeniably been a catalyst for increased investor interest in mutual funds. However, investors must be mindful of the inherent risks associated with these segments and approach them with a long-term perspective and a risk-tolerant investment strategy.

 

As the financial landscape continues to change, mutual funds are likely to adapt and offer even more sophisticated investment options. This article elucidates the various types of best mutual funds for beginners.

Historically, investment in equities is known to offer significant returns in the long term, and equity-oriented mutual funds make it easy for novice investors to start investing right away in a diverse portfolio and begin their journey towards wealth creation.

1. Large-cap Mutual Funds -

Large-cap funds invest in stocks of companies which are in the top 100 companies by market capitalisation and stock market evaluation. Since these funds are stable and carry a relatively lower risk, it is a good investment choice for beginners who have just started learning about the market. Large-cap funds invest at least 80% of their corpus in high-quality blue-chip companies and are capable of offering decent returns. These funds offer stability to your portfolio during volatile market conditions.

Here's a List of the top 3 Large-cap Mutual Funds for Beginners:

Scheme Name Absolute Returns (%) CAGR Returns (%) Risk Ratios
6 months 1 year 3 years 5 years 10 years Sharpe Ratio (SR) Standard deviation (SD)
Nippon India Large Cap Fund 21.23 37.76 25.25 19.73 17.49 0.44 14.03
ICICI Pru Blue-chip Fund 21.28 37.11 21.49 19.50 16.24 0.40 12.61
HDFC Top 100 Fund 17.34 32.72 20.85 17.22 14.64 0.38 13.53
Data as of May 14, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)
 

Large cap funds invest in stocks of well-established companies with large market capitalisations. These companies are typically less volatile than smaller companies, which can make large cap funds a good option for beginners who are looking for a relatively stable investment. Large cap funds also tend to offer lower potential returns than small and mid-cap funds.

2. Equity Linked Savings Scheme (ELSS) -

Many of you also seek tax-saving options, and mutual funds offer tax-saving schemes that help you avail yourself of tax deductions of up to Rs 1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961. These mutual fund schemes are called Equity-linked Savings Scheme (ELSS).

[Read: 4 Best ELSS for 2024 - Top Performing Tax Saving Mutual Funds in India]

ELSS is similar to any other diversified equity mutual fund except that it comes with a 3-year lock-in period and tax advantage. ELSS funds are an excellent option for salaried individuals starting their investment journey and looking to save some tax. These funds have the potential to give a higher rate of returns compared to other tax-saving options under Section 80C like NPS, PPF, etc.

Here's a List of the top 3 ELSS Mutual Funds for Beginners:

Scheme Name Absolute Returns (%) CAGR Returns (%) Risk Ratios
6 months 1 year 3 years 5 years 10 years Sharpe Ratio (SR) Standard deviation (SD)
HDFC ELSS Tax Saver Fund 23.47 43.29 26.95 19.69 15.29 0.49 13.04
Parag Parikh ELSS Tax Saver Fund 15.08 30.41 22.21 - - 0.47 11.22
Quant ELSS Tax Saver Fund 29.21 56.14 27.47 35.08 26.12 0.40 18.39
Data as of May 14, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)
 

3. Multi-Asset Allocation Funds -

No two asset classes perform in the same direction simultaneously in a market phase. Multi-asset Allocation Funds are a type of mutual fund that invest across different asset classes like equity, debt, and gold. The rationale behind using different asset classes rides on the fact that each asset behaves differently during various market phases.

Thus, these funds provide a dynamic asset allocation based on the prevailing market conditions to gain steady returns. Diversification helps lower the risks that come with investing in a single asset class compared to pure equity funds.

Here's a List of the top 3 Multi-asset Allocation Mutual Funds for Beginners:

Scheme Name Absolute Returns (%) CAGR Returns (%) Risk Ratios
6 months 1 year 3 years 5 years 10 years Sharpe Ratio (SR) Standard deviation (SD)
HDFC Multi-Asset Fund 13.22 22.24 15.44 16.22 12.04 0.47 7.09
ICICI Pru Multi-Asset Fund 18.13 32.21 23.72 21.20 16.54 0.62 9.14
SBI Multi-Asset Allocation Fund 15.16 27.97 15.65 15.70 12.50 0.47 7.38
Data as of May 14, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)
 

[Read: Why Investing in Multi-Asset Allocation Funds Makes Sense Now]

Overall, multi-asset allocation funds can be a great starting point for beginners in MFs, offering diversification, risk management, and a simplified approach. However, it's important to understand the fund's specific asset allocation and fees and to consider your own risk tolerance and investment goals. They provide a convenient, diversified, and potentially less volatile way to invest in mutual funds.

4. Balanced or Hybrid Mutual Funds

You see, such funds are a good option for beginners looking for a moderate level of risk and return. Think of balanced or hybrid mutual funds as a mix of two worlds: stocks (equities) and bonds (debt). They invest in both, aiming to provide a balance between growth potential from stocks and stability from bonds. This makes them generally less volatile than pure equity funds.

Given that balanced or hybrid funds invest in a mix of equity and bonds, it could help reduce overall portfolio volatility over time. These schemes are typically suited for long-term goals (5+ years). The equity portion helps with potential growth, while the debt portion provides stability.

However, there could be a slight confusion for beginners in understanding the difference between - Balanced Funds, Balanced Advantage Funds, and Hybrid Mutual Funds. Do note all of them fall under the umbrella of hybrid mutual funds in India (2024). Here's a breakdown of the key differences:

Feature Balanced Funds Balanced Advantage Funds Hybrid Mutual Funds
Investment Strategy Aims for moderate growth with a focus on stability. Aims to capture market upsides while minimising downside risk. Invest in a combination of equity (stocks), debt (bonds), and sometimes even derivatives. Offers diversification and caters to various risk profiles.
Asset Allocation Fixed (60% equity and 40% debt) Dynamic (changes based on market) Varies across sub-categories (Aggressive or Conservative)
Risk Profile Moderate Moderate to moderately high Varies across sub-categories (Aggressive or Conservative)
Tax Treatment Debt fund (if equity allocation < 65%) Equity fund Equity or debt fund depending on category (Aggressive or Conservative)
 

The asset allocation between equity and debt will vary depending on the specific fund type; however, this balanced approach helps provide some cushion against equity market downturns.

5. Index Funds or ETFs -

Index Funds and Exchange-traded Funds (ETFs) are the two vehicles that drive the passive investing options for beginners. These funds are designed to mirror market indices like the Nifty 50 index, the S&P BSE 500, or any other specific sectoral or thematic index and provide investors with exposure to a diversified fund across sectors. This eliminates the need for actively picking stocks, saving you time and research effort.

[Read: Index Funds vs Mutual Funds: Know the Difference]

These are passively managed funds that allocate majority of its asset to the units as per the underlying index and merely replicate the underlying index's performance while limiting fund managers' intervention. For those new to mutual funds, these schemes provide decent returns at a low cost and reduce the stock-selection risk.

Historically, index funds and ETFs have matched or even outperformed actively managed funds over the long term. This is because passively tracking an index avoids the risk of underperforming the market due to a fund manager bias. Index funds and ETFs are well-suited for a buy-and-hold strategy, which is ideal for beginners.

The 2024 Market Landscape

As of April 2024, the Indian equity market presents a mixed picture. Major indices like the S&P 500 and the Nifty 50 are currently experiencing some volatility. While they have shown positive returns year-to-date, concerns about inflation and rising interest rates have led to fluctuations.

The Nifty 50 index is currently hovering around 22,000 (a slight increase from the beginning of the year), and the S&P BSE Sensex is at 73,000 (a slight decline from its all-time high of 75,000 in March 2024). However, in April 2024, foreign portfolio investors (FPIs) were net sellers, pulling out funds from the Indian equity market, which also led to a temporary correction.

[Read: Do General Elections Matter for the Indian Equity Markets]

Bond yields, which move inversely to bond prices, have been rising in 2024 as central banks tighten monetary policy to combat inflation. This can be seen as a positive sign for income-seeking investors in debt funds.

In Addition, the ongoing geopolitical situation continues to cast a shadow on global markets, adding to the volatility. Any hikes by central banks can influence the Indian market; thus, investors should stay informed about these developments.

To conclude...

Mutual Funds offer a powerful tool for wealth creation in the 2024 market. Their accessibility, diversification, and professional management make them a compelling choice for many investors. However, it's crucial to understand the different types of funds, the current market dynamics, and the associated costs before investing. By carefully considering your risk tolerance and investment goals, you can leverage mutual funds to navigate the market and build a strong financial future.

Frequently Asked Questions (FAQ)

1. What is NAV in mutual funds? 

Mutual funds are bought or sold based on Net Asset Value (NAV). NAV is essentially the price of a unit in a mutual fund scheme. NAV is calculated by dividing the net assets (market value of the securities and cash held by the fund minus the liabilities) of the fund by the total number of units outstanding.

2. What are Direct and Regular plans in mutual funds?

If you make your mutual fund investment through a financial advisor, you will invest in, what is known as, a regular plan of the mutual fund scheme. However, If you submit your mutual fund investment application directly to the AMC (online or offline), you will invest in, what is known as, the direct plan of the scheme.

3. What is Expense Ratio in mutual funds? 

The expense ratio is the annual cost incurred by the AMC to operate a mutual fund scheme, expressed as a percentage of the total assets of the scheme. The cost includes fund manager expenses, cost of the supporting infrastructure for the fund manager, transaction costs (for buying and selling securities), marketing and distribution costs. Investors should note that the NAV of a scheme is net of the expense ratio. Expense ratios of different schemes and plans of the same AMC may be different.

4. What is Exit load in mutual funds? 

AMCs or any mutual fund distributor may charge a fee if you redeem (sell) your units within a specified period from the date of investment. This fee is known as exit load. Investors should note that exit load does not just apply to redemptions; they are also applicable for switches, Systematic Transfer Plans (STP) and Systematic Withdrawal Plans (SWP), as long as those transactions take place, within the exit load period.

We are on Telegram! Join thousands of like-minded investors and our editors right now.


MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

 


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

PersonalFN' requests your view! Post a comment on "Best Mutual Funds for Beginners". Click here!

Most Related Articles

Best Infrastructure Mutual Funds: ICICI Pru Infrastructure Fund vs DSP India T.I.G.E.R Fund Prime Minister Narendra Modi's government initiatives and private sector investment are driving a dramatic revolution in India's infrastructure sector.

Jun 14, 2024

Top 5 Green Energy Mutual Funds: Powering Your Portfolio with Sustainability This article evaluates the top mutual funds to invest in that have a high allocation to Green Energy Stocks

Jun 12, 2024

June 4th Glitch: Don't Miss the Next Dip! Know Your Mutual Fund Cut-Off Times It's vital to always check the specific cut-off timings for your chosen investment method and mutual fund category before placing your order.

Jun 11, 2024

What Happens If Your Demat Account and Mutual Fund Folios Do Not Have Nominations When it comes to financial assets and physical assets, having a nomination is ideal. It ensures that your hard-earned savings and investments are passed on to your loved ones.

Jun 11, 2024

Did You Invest in MFs On June 4 But Were Allotted Units The Next Day? Know Here Why This article delves into the details of this incident, exploring the reasons behind the delay, the impact on investors, and potential solutions.

Jun 10, 2024

Most Popular

Manufacturing Mutual Funds Shine. Are they Worthy of Your Investment Portfolio?Currently contributing around 17% to the GDP, the manufacturing sector is expected to grow to 21% in the next 6-7 years.

May 06, 2024

6 Equity Mutual Funds to Benefit from India’s Defence SectorThe potential to benefit by sensibly taking exposure to defence sector stocks is huge!

Apr 17, 2024

Top 5 Mutual Funds with High Exposure to EV RevolutionThis article will evaluate the top mutual funds to invest in 2024 that have a high allocation to EV stocks.

Feb 06, 2024

Top 5 Mutual Funds That Are Betting on the Manufacturing BoomThis article will evaluate the top mutual funds to invest in 2023 that have a high allocation to Manufacturing stocks.

Sep 01, 2023

HDFC Mutual Fund launches HDFC Manufacturing FundHDFC Mutual Fund launches HDFC Manufacturing Fund

May 08, 2024