What are mutual funds? An investment guide for beginners (2024)

Investing in mutual funds for beginners

So, basically, there are three major categories of mutual funds- large-cap mutual funds, mid-cap mutual funds, and small-cap mutual funds.

Major categories of Mutual Funds (MFs)

Large-cap mutual funds: These are the blue-chip of India with a market capitalisation of more than ₹10,000 crore. “The following funds are considered to be safer in comparison to the others due to their strong financials plus they are highly liquid. The annual return expected from these funds would be 12-15%," said Hemant Sood, Founder at FinDoc.

Mid-cap mutual funds: The investments made in these funds are done in mid-sized companies in India. They are to be considered to be the fastest-growing companies and eventually aim to enter the Nifty 50 Index. According to Hemant Sood, they tend to give a slightly better return than the large-cap of about 15-18% with a little higher risk as well.

Small-cap mutual funds: These funds invest money in companies that are much smaller in size with a market capitalization of less than ₹5,000 crore. “They are highly risky as well due to less liquidity and sometimes financial issues. As they say higher the risk, the higher the return, and the returns expected from small caps is around 20%," said Sood.

Furthermore, there are various other categories like multi-cap funds, flexi-cap fund, and value fund which tends to invest in undervalued companies which tend to give higher returns. Other than this there are sectoral/thematic funds

One can also consider dividend yield funds which invest in companies that generate higher dividend yields, focused funds, and ELSS funds which are meant for tax savings.

According to tax and investment expert Balwant Jain, “Investing in mutual funds is like betting on the racehorse season-on-season. You have to change the bets on different horses, similarly, you have to keep reviewing your funds and see the performance time and time again. "

Tips for beginners investing in mutual funds

Balwant Jain shared some tips for those investing in mutual funds for the first time.

1) Beginners should start with index funds. An index fund is a type of mutual fund or exchange-traded fund that seeks to track the returns of a market index (Sensex, Nifty).

2) Once you get a hang of it, you can see the risk appetite, then consider investing in large, mid, or small-cap mutual funds, suggested Jain.

2) Investments in index funds need not be reviewed. For diversified funds, you need to regularly monitor and review your investment. According to the tax and investment expert, if the funds' performance is below the benchmark level, then you need to do active management. corrective action

3) SIP is the best option for beginners who have just entered the investment space. With SIP, you get to start investing with as little as ₹500 a month, and take advantage of the growth of the Indian stock market.

4) Don't just carried away and invest in a fund that's doing good. You should not have more than 4-5 funds in your portfolio, and that should be a mix of small, mid, flexi, and large-cap. For large cap, Balwant Jain advised going for index funds.

These are the variety of categories available when it comes to investment in equity mutual fund schemes which one can choose from as per his/her return expectation and individual risk appetite. All these can be used for long-term investments as markets can be extremely volatile in the short term.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 11 May 2023, 01:29 PM IST