Choose Your First Mutual Fund Online: Step-By-Step Guide

Direct stock investing can feel overwhelming, especially if you're short on time, unsure where to start, or prefer to avoid high risk. That’s why many first-time investors choose mutual funds. They offer a more accessible way to potentially benefit from the stock market, without needing to track every market move yourself.

So if you’re wondering, “Can I invest in mutual funds online for the first time?” The answer is yes. With digital platforms and resources, starting your investment journey has never been easier.

• Table of contents

• Why choosing your first fund is so important
• What are the qualities that your first fund should have?
• Investment duration

Why choosing your first fund is so important

Your first mutual fund can play an important role in shaping your investment habits. Pick a fund suited to your needs, and you’re more likely to stay invested, learn gradually, and gain confidence. Choose one that’s too complex or risky, and it could lead to stress or early withdrawals.

Here’s why your first choice is important:

• Long-term impact: Even small potential returns, when compounded over time, can grow into a sizeable amount.
• Risk assessment: Your first fund helps you understand your risk comfort zone.
• Learning curve: By tracking your fund returns and monitoring your portfolio, you can understand performance patterns and market cycles.
• Behavioral advantage: Seeing consistent, moderate potential gains encourages discipline. You’re less likely to panic-sell at market dips if your first experience is positive.

Read Also: Tips To Choose a Mutual Fund That Suits Your Financial Goal

What are the qualities that your first fund should have?

When searching how to choose mutual funds or identifying a mutual fund for beginners, focus on simplicity and clarity. SEBI’s scheme categorisation rules can give you a comprehensive overview of the types of schemes available in India. Additionally, here are some factors to consider:

1. Low expense ratio
   • A lower expense ratio keeps your costs down and keeps more of your money invested.
2. Reasonable risk profile
   • Avoid overly volatile equity schemes until you’re comfortable and feel confident.
   • Check the fund’s risk metrics such as beta, standard deviation, Information Ratio etc. Look for funds with strong risk-adjusted returns, meaning they generated returns without taking on excessive risk.
3. Adequate liquidity
   • If you need cash quickly, you should avoid locking money away for too long. Some funds have a lock-in period or are close-ended, and it is important to know about this before investing.
   • Some funds might allow instant redemption or have T+1 settlement, but never assume every fund provides same-day access.
4. Simple portfolio
   • Funds that track well-known indices or hold top-rated companies can be easier to follow.
   • Avoid niche or sectoral funds until you grasp basic market dynamics.
5. Clear objectives and track record
   • Funds with transparent investment mandates aligned to broad goals can be suitable for beginners.

When you’re researching the first mutual fund to invest in, these qualities help narrow choices and reduce confusion.

Investment duration

Your investment time frame is a key factor in deciding which mutual fund to pick. Typically, equity-oriented funds are more suitable for long investment horizons because the risk of market volatility is higher in the short term. Debt funds, being relatively stable, can be considered for short-term goals. Here's how you can match your goal duration with fund types:

Funds for up to 1-month investment duration

Not all mutual funds suit short stints under 30 days. For durations up to one month, you may consider:

• Liquid funds
  • These funds typically invest in money-market instruments with maturity of up to 91 days.
  • They are relatively stable and allow easy access to funds, making them suitable for short-term needs.
• Overnight funds
  • These invest exclusively in overnight securities, ensuring minimal interest rate risk.
  • They also offer high liquidity, with some AMCs offering instant redemption.

Considerations:

• • Even for 1-month goals, check expense ratios and exit loads.
  • Though returns may be modest, liquidity and relative stability of capital is the priority.

Funds for 1-year investment horizon

When your horizon extends to around one year, you can explore options that balance potential yield and safety.

• Ultra-short duration funds
  • Maturity profile of portfolio instruments between three to six months.
  • Slightly higher potential yields than liquid funds, with slightly higher increased interest rate sensitivity.
• Conservative hybrid funds
  • Blend debt (minimum 75%) and equity (up to 25%) to smooth potential returns.
  • Limited equity exposure can help investors assess their comfort with stock market volatility without taking on too much risk.

Key tips:

• • Confirm there’s no exit load after 12 months to avoid surprises.
  • Compare returns of different funds but prioritise relative stability over performance.

Funds for 1-3-year investment period

You can start exploring options with slightly higher risk And return potential. These may include:

• Short-duration funds
  • Average portfolio maturity of one to three years.
  • Sensitive to interest rate changes but deliver relatively higher potential yields than ultra-short duration funds.
• Dynamic bond funds
  • Managers adjust duration based on rate outlook giving more flexibility to cushion shocks.
• Balanced advantage funds
  • For a three-year horizon, such funds can be suitable as they automatically rebalance equity-debt mix based on market valuations, mitigating the impact of volatility. However, balanced advantage funds may not be suitable when investing for just one or two years because they can contain a significant equity component.

Read Also: Types of Mutual Funds for Beginners: A Beginner’s Guide to Investing

Conclusion

Mutual funds offer diversification and mitigate risk, making them suitable for your debut in the world of trading. Before investing, try to gain as much knowledge about the subject as possible and analyse the funds you’re considering well. It’s important to understand that while mutual funds can be less risky as compared to direct stock trading, they are still subject to market risks. Equity funds, in particular, are categorised as very high risk. It’s always recommended to consult a financial expert who can guide you through your investment journey.

FAQs:

Why is choice of the first mutual fund important?

Your first fund sets the tone for your investing journey. It helps you build good habits, stay invested through market ups and downs, and understand your personal risk tolerance.

What should I look for in my first mutual fund?

Look for a fund with a low expense ratio, a moderate risk profile and an investment approach that you find easy to understand and monitor.

Which fund is suitable for an investment duration of up to 1 month?

Liquid and overnight funds offer high liquidity with next-day or same-day redemption options.

Which fund should I choose for a 1-year investment horizon?

Ultra-short duration or conservative hybrid funds can be suitable 1 year mutual fund choices. These can balance modest potential returns with relative stability of capital, making them beginner-friendly for one-year goals.

What are the recommended funds for a 1-3 year investment period?

Most debt fund categories can be suitable for this period.