Best Mutual Funds for Beginners in 2022

Mutual funds have become one of the most common investment options for average Indian citizens. As an investor in India who wishes to invest in mutual funds, you will have numerous choices available in the market that have historically given relatively high returns.

If you are new to investing and looking for the best mutual funds, you want to learn about all the different options. Furthermore, it would be best to consider multiple factors like  financial goals, time limit and risk tolerance. Learning about the basics of mutual funds and how they work is also essential .

What Is a Mutual Fund?

A mutual fund is a type of investment vehicle where an Asset Management Company (AMC) accumulates money from many investors. Fund managers employed by these AMCs invest the money collected from investors into various assets. These can include stocks, bonds, money market instruments and other securities.

Fund managers are financial experts and have experience working in this field for many years. When you invest your money in mutual funds, you do not need to keep track of your funds like you would have to do while investing in stocks.  Here the fund managers are doing that on your behalf. 

Experts often suggest that budding investors opt for mutual funds because they are convenient.  Over time, the investor will also be able to gain more knowledge about the stock market. 

Before an investor picks a mutual fund, they  need to consider several important factors such as their  risk appetite, expected returns and investment horizon.

List of Best Mutual Funds for Beginners

The table below illustrates some of the best mutual funds to invest in for beginners:

*NAV and returns as of November 22, 2022 

How Do Mutual Funds Work?

For beginners, understanding mutual funds before starting to invest is crucial. As we have mentioned, an AMC pools funds from all sorts of investors with a common objective under a mutual fund scheme. Then, they use that collected money to buy stocks, corporate bonds, government securities, etc., from the market.

Mutual funds invest their corpus in many different types of companies in the market, which is why it creates a diversified portfolio for the investor. Observing historically, mutual funds reduce some of the market-related risks as they diversify their portfolio.

Fund managers allocate the total funds of a mutual fund scheme’s  total funds as per its objective, intending to earn capital gains and interest income. Profits and losses accumulated from these investments are distributed among investors according to their holdings. Investors can redeem units of their mutual fund investments at the scheme’s Net Asset Value (NAV).

Investors can choose to invest in mutual funds via two routes: SIP and lump sum. SIP is a systematic investment plan that allows people to invest a certain sum of money daily, weekly, monthly, quarterly,  semi-annually or annually in a mutual fund scheme. This payment continues until the schemes reach maturity or the investor terminates the investments. 

On the other hand, a lump sum is a one-time payment method where people invest a large sum of money in the beginning and wait for their returns in the long-term. 

What Are the Different Types of Mutual Funds?

As an investor, you will come across many different types of mutual funds. Here is a beginner’s guide to types of mutual funds:

1. Mutual funds based on assets

We can divide mutual funds based on their asset classes into five categories, and they are:

a) Equity funds: Equity funds use pooled investments from investors to purchase shares of companies listed on the stock market. Because of this, the market conditions can affect their returns. These funds have a history of providing excellent returns, but investors should also be careful of the higher risks involved. 

b) Debt funds: If someone chooses to invest in debt funds, they will place their money in debt securities like corporate bonds, Treasury Bills (T-bills), and Government Securities (G-secs).  These instruments are fixed-income securities, and that is why they carry lower risks compared to equity instruments.

c) Hybrid funds: These funds integrate equity and debt instruments into one fund. This way, the investors can get the best of both, higher returns and lower market-related risks. 

d) Solution-oriented funds: AMCs specifically curate these funds to help investors achieve personal financial goals like retirement or children’s higher education. 

e) Other funds: This category includes index funds, Exchange Traded Funds (ETFs)  and Fund of Funds (FoF). 

2. Mutual funds based on structure

Mutual funds can be divided into three categories based on their structure and ease of investment. These funds are:

a) Open-ended funds: These funds can be suitable for individuals seeking liquidity. Furthermore, these funds allow investors to enter and exit with ease. In simpler terms, these funds do not have the power to decide when the investors can buy these fund units and what amount they want. 

b) Close-ended funds: Unlike open-ended funds, these do not offer investors the flexibility of choosing their capital amounts or maturity date. However, schemes that are close-ended in nature trade on the stock exchanges so that they can facilitate some liquidity. 

c) Interval funds: These are a cross of open-ended and closed-ended funds. Interval mutual funds allow investors to purchase fund units at predetermined intervals. Investors can easily buy or redeem their fund units when the trade window is open.

3. Mutual Funds based on investment goals

You can also invest in mutual funds to fulfil your personal financial goals. Mutual funds can be categorised into the following based on investors’ financial goals:

1. ELSS: ELSS refers to Equity Linked Saving Schemes, and people usually invest in these funds to get tax deductions. Under Section 80C of the Income Tax Act, if you invest in such funds, you will be eligible for aggregate deduction up to ₹1,50,000.
2. Pension funds: AMCs specifically curate these funds to create a significant retirement corpus. This corpus can then be invested by the investor in an SWP to get a regular income as pension.
3. Growth funds: These funds invest their total corpus into equity and related securities. Hence, these funds have potential to generate substantial capital appreciation. Investors looking for high returns can invest in such funds.
4. Fixed maturity funds: Fixed maturity funds aim to get stable returns.   Their fund managers choose to invest the corpus in debt instruments. Furthermore, these debt instruments should have the same maturity period as the maturity date of the fund scheme. 
5. Liquid funds: These funds have high liquidity and can help investors achieve their short-term financial goals. 
6. Capital protection funds: These funds split their corpus in fixed income instruments. In the past, it has been noticed that the risks involved will be nominal, but the investor will still be responsible for paying taxes on the returns he obtains.

What Are the Benefits of Investing in Mutual Funds?

There are numerous benefits that individuals will get if they invest in mutual fund schemes. These benefits are listed below:

1. Expert Management

Investing in mutual funds for beginners can be confusing, and having a professional take responsibility can be very helpful. Mutual fund managers are experts who carry out research before purchasing any stock or bond. 

Furthermore, they have more skills and resources to conduct extensive market research compared to retail investors. These fund managers constantly keep track of the market and review the portfolio.

2. Liquidity

If you have invested in an open-ended type of mutual fund, you will have the power to liquidate your fund units at any time. You can redeem these funds on any business day and use them to meet your financial requirements. As per the Turnaround Time (TAT), the amount gets deposited into your bank account within one or a few days, depending on the scheme. 

3. Diversification

Investing in mutual funds will allow you to diversify your investment portfolio. You can simultaneously invest in several securities, like debt, equity and gold.  This way, you will also be able to balance the risks that one asset class brings individually. 

4. Accessibility

One of the significant advantages of mutual funds is that you can start investing from anywhere in the world. You can invest in mutual funds from several  sources :

• Brokerage Companies
• AMC’s online mutual fund investing platforms
• Registrars such as Karvy and CAMS
• Banks and Mutual Fund Distributors

5. Well-Regulated

SEBI regulates all the mutual funds. They have framed strict rules and regulations that all AMCs must follow . This way, SEBI can protect the investors’ rights and offer them transparency. 

6. Low Cost

Investing directly in the stock market will be more costly, whereas mutual funds have a low expense ratio.  Furthermore, you can start investing via SIPs in mutual funds for as low as ₹100 per month. 

7. Tax Benefits

ELSS schemes allow investors to claim tax benefits under Section 80C.

Who Should Invest in Mutual Funds?

Now that you are aware of the benefits of mutual funds, let us tell you about the kind of investors who can invest in mutual funds:

• Like budding investors, people with limited knowledge of the stock market can opt to invest in mutual funds.  
• Individuals looking to reap the maximum benefits of Section 80C of the Income Tax act can choose to invest in ELSS mutual funds.
• Investors looking to diversify their portfolios can also invest their savings in mutual funds. Mutual funds invest money into stocks across different markets and company sizes, and  debt instruments.
• If you are looking for long-term investments, you should consider investing via SIPs in mutual funds, which  helps you create wealth in the long-term. 

What Are the Factors to Consider Before Investing in Mutual Funds?

Below are certain factors that individuals must keep in mind before they start investing in mutual funds:

• Fund manager’s experience- Fund managers are the ones who will look after your mutual fund investments. Therefore, it is essential to check the  years of experience they have working in this field. Furthermore, you should also check the track record of the AMC itself. If AMC is well-known for handling mutual funds that consistently outperforms its benchmark, it may have the potential to generate better returns in the future. 
• Performance in its category- It would be wise to compare a particular fund scheme’s performance with all the other funds that fall under the same category. This will help you choose a better mutual fund aligned with your financial needs. 
• Expense ratio- The expense ratio is the fee levied for expenses that go into maintaining a mutual fund. This includes the remuneration of the managers as well as operating, advertising and other expenses. Therefore, you will receive lower returns if you opt for a mutual fund scheme with a high expense ratio.   
• Risk levels- Before investing, you should check what risks a mutual fund takes to deliver its expected returns. Then, assess whether you are comfortable taking such risks. Also, check whether you can bear the market volatility and losses involved in mutual fund investments.
• Consistency of performance- Well-performing mutual funds tend to generate high or at least stable returns during both bull and bear market phases. Mutual funds that have consistently outperformed its peers for a long time are much safer compared to the ones that occasionally provide high returns. 

Taxation of Mutual Funds

Capital gains derived from the increase in NAV of mutual funds are subject to capital gains tax. The tax rate depends on the holding period and the equity and debt component of the mutual fund investment. The following tables show the taxation of equity-oriented and non-equity funds.

For equity-oriented funds-

For non-equity funds (from 1st April 2023 onwards)-

Final Thoughts 

Most people are afraid of investing their money in the share market, which is where mutual funds come into the picture. Investing in mutual funds is an easy and convenient way to earn substantial profits over the long run, especially for beginners. 

However, before you start investing, you need to be aware of the various risks and other crucial details involved. The above guide on mutual funds for beginners will help you in this regard.

Frequently Asked Questions (FAQs)