Your first mutual fund

Useful, simple to understand and easy to execute, these should be the qualities that your first mutual fund should have.

For beginners, these requirements are generally best satisfied by tax-saving mutual funds (if needed) or aggressive hybrid funds. Here's why. When you start investing in mutual funds, it makes sense to start with one that invests mostly in equity. After all, equity is the best way to invest for the long term, and mutual funds are the simplest route for investing in equity. Also, you are likely to have no equity investments at all. Investors at an early stage of their investing journey generally have bank deposits, PPF and other fixed-income investments.

Tax Saving Mutual Funds

These mutual funds are also called ELSS funds as their formal name in the tax law is Equity-Linked Savings Scheme. They are basically all-equity funds, which are eligible for tax exemptions under Section 80C of the Income Tax Act. Under Section 80C, you can invest up to Rs 1.5 lakh in a set of investments, one of which is ELSS funds. Since they are equity funds, one should invest in them for the long term.

However, it must be noted that with the recent Budget, the government is solidifying a shift towards the New Tax Regime. This means that the New Tax Regime will become the more attractive option over time. However, if you plan to stick to the Old Tax Regime, you can opt for ELSS funds, and enjoy their tax benefits.

Also, this fund has a three-year lock-in period, which makes it a great way to stay invested through fluctuations in the equity markets.

Suggested read: New tax regime looks even better now. Time to ditch the old regime?

Aggressive Hybrid Funds

These mutual funds combine equity and debt with a typical asset allocation of 65:35 between the two. Debt as an asset class is not dependent on stock market performance and is not volatile. Therefore, a great advantage of these funds is that it controls the equity volatility to some extent. They make good returns when the markets go up, but when the markets crumble, the debt component cushions the fall. Aggressive hybrid funds are therefore suitable for first-time investors. It plays an important psychological role to help you stay the course and not exit the fund in panic, which is the most crucial bit at the start.

Also read: A beginner's guide to mutual funds