Best Mutual funds for beginners

In this article we shall be discussing the best mutual funds for first-time investors or the investors who are in the initial stages of mutual fund investing:

The basic reason why many investors avoid mutual funds is volatility. Hence the funds which are relatively less volatile are best suited for new investors. The same is as detailed below:


1.    Index Funds (Nifty50 & Sensex)

2.    Hybrid/Balanced Funds

 We shall be discussing these funds in detail.

Index Funds

One of the greatest investors of all time Mr. Warrren Buffett has said

By periodically investing in an index fund, the know-nothing investors can outperform most investment professionals

Index funds track a particular financial index. These indexes are formed to gauze the performance of financial markets. Seems confusing?  Let us understand it with an example.

Nifty 50

NSE (National Stock Exchange of India Limited) is an Indian exchange for the sale and purchase of securities like shares of listed companies. There are hundreds of companies that can be traded at NSE. On a given day the shares price of many companies increases while the share of many companies decreases. Hence it shall not represent the market sentiment and overall direction of the market for any day or any time frame.

To sort out this problem, NSE has selected 50 large companies out of all the listed companies and created the Nifty 50 index which represents the weighted average of these 50 companies. These companies are selected based on predefined rules. The movement in share prices of these 50 companies is represented as a movement in Nifty 50 which then represents the overall market sentiment and performance in a given time frame.

For example, Nifty 50 has increased from 8597 as of 31.03.2020 to 14690 on 31.03.2021. Hence the index has increased by 70.87% during the period or we can say those who had invested in the companies in the index (in the same proportion as of index) on 31.03.2020 has gained more than 70% during the period.

There are various other indexes apart from Nifty 50 like Sensex, Nifty 100, Nifty 250, Nifty Pharma, etc. These all represent the movement, sentiment, etc for a particular set of companies, segments of the market. For example, Nifty pharma represents the movement in pharma stocks and if the index is doing better than Nifty 50, it reflects that the pharma companies are doing better (delivering better returns) than the overall market.

Index Funds vs actively managed funds

When you invest in index funds it means that the fund manager shall invest in all the companies of the index and the same weight-age as that of the index. For example, a Nifty 50 index fund shall invest in all the companies in the Nifty 50 index and if HDFC bank has 10% weight-age in the Nifty 50 index, 10% of the investment of Index fund shall be in HDFC bank.

This is in contrast to the actively managed funds where the fund manager decides the companies and the extent of investment in a particular company. For example, in a large-cap fund, the fund manager may decide to allocate 15% investment to HDFC bank and may reduce the position anytime as per his choice. The expense ratio of actively managed funds is higher than the index funds.

There are several index funds available in the market but for beginners Nifty 50 and Sensex index funds are best suited as they invest in the largest companies. These schemes are offered by various fund houses like HDFC, ICICI, UTI, Axis, Nippon, etc.

Benefits of Investing through Index Funds

During recent times many actively managed funds have under-performed (delivered lower returns) than the index funds. The main benefits of investing through index funds are as under

Decent return over a long period

The index funds can generate decent returns over a long period. The Sensex has given more than 15% compounded returns during the last 41 years which is better than many actively managed mutual fund schemes.

Low Expense ratio

The expense ratio of an index fund is substantially lower than actively managed funds. While actively managed funds generally charge 0.75% to 1.25% in “Direct plans” and 1.00% to 2.00% in “Regular plans”, the expense ratio of most index funds is in the range of 0.10% to 0.30%.

Eliminate Fund manager Bias

The actively managed funds may have a human bias as sometimes fund managers may get too optimistic or too pessimistic about investments. The index funds overcome the issue as they track a particular index without any discretion of the fund manager.

Hybrid/Balanced Funds

Hybrid funds are the funds that invest in equity as well as debt. The equity helps in improving the return while the debt component helps in providing stability of return. The returns, however, are lower than the equity mutual funds. The main hybrid funds are as detailed below

Equity-Oriented Hybrid funds

These mutual funds invest a majority of the corpus (minimum of 65%) in equity and balance in debt instruments like corporate bonds, G-Sec, etc.

Debt-oriented Hybrid funds

These funds invest a majority of the corpus (minimum 60%) in debt instruments and balance in equity or equity-related instruments.

In hybrid/Balanced funds the fund manager may increase the investment in debt or equity depending upon the market conditions. For example in a falling market, a fund manager may increase the debt component to preserve the capital while in a rising market, he may increase the equity component to generate better returns.

These hybrid funds are suggested only to gain confidence. As we are discussing investments for long-term goals that are decades away, equity mutual funds are the best option to generate wealth.

Mutual fund Schemes

In the case of an index fund, you may invest in the mutual fund scheme of any fund house as per your comfort as the results are more or less the same. We have shortlisted some mutual fund schemes in the categories as discussed above which you may consider.


Index Funds

UTI Nifty Index fund-Direct Plan-Growth

HDFC Index Fund- Direct Plan- Nifty 50 plan

HDFC Index Fund- Direct plan- Sensex Plan

ICICI Prudential Nifty Index Fund-Direct Plan-Growth


Hybrid Funds

DSP Equity & Bond Fund- Direct plan- Growth

SBI Equity Hybrid Fund- Direct plan- Growth

HDFC Hybrid Equity Fund- Direct Plan-Growth

ICICI Pru Equity & Debt fund- Direct plan- Growth


The index funds are one of the best investments for new investors. The same can also be continued for the long term. The index funds have always remained part of my mutual fund portfolio. Hybrid funds can also be considered to gain confidence in mutual fund investing. 

As per a Chinese proverb

A journey of thousand miles starts with a single step.

It also holds in our case. So let us take the first step towards the journey to become financially independent and retire early. You are sure to succeed with patience and continuous effort in the right direction.

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