Buying your first mutual fund
Most beginners have their money parked in fixed deposits, recurring deposits, PPF or other fixed income instruments. When buying your first mutual fund it makes sense to invest in a fund that invests in equity, as you may not be having any equity investments. Equity is the best instrument for the long term and equities are the easiest way to invest in mutual funds. There are two type of equity mutual fund which could be ideal for a beginner. These are Tax-saving funds and balanced funds.
Tax saving funds:
Many mutual fund experts recommend a beginner to invest in Equity Linked Saving Schemes (ELSS). They say that it is an ideal way to get started with investing in mutual funds. As ELSS has a mandatory lock in period of 3 years, which means the investor cannot sell their investments. This mandatory lock in period helps them to get used to the volatility associated with equity mutual funds as they invest pre-dominantly in equity markets. They learn a very important lesson about investing: you don’t have to fear volatility when investing, if you stick to your goals and have a long-term view, you will eventually be rewarded with good returns.
Balanced funds invest in a combination of equity and debt instruments. So a balance fund is not as risky as an equity mutual fund as some percentage of the funds is also invested in debt instruments. The great advantage of balance funds is that they are a safe investment to have. They give good returns when the markets are rising but when the markets are falling, they fall less due to the investments made in debt.