Choosing the right mutual fund can feel overwhelming for a first-time investor. With a wide array of schemes and categories ranging from equity to debt to hybrid, it is easy to get lost in financial jargon. But experts say that a few basic principles can help new investors get started on the right foot. By focusing on the basics rather than chasing trends, you will be better positioned to make informed decisions and build a strong foundation for the future.

Start with your goals, not the fund type

One of the most common mistakes new investors make is picking a fund solely based on returns or popularity. Financial experts emphasise that the first step should always be to understand your own investment goals, risk appetite, and time horizon.

“As a financial advisor, I first try to understand why a person is investing and for how long. That helps narrow down the right category,” said Nikunj Saraf, VP at Choice Wealth. For instance, if you are saving for a long-term goal like buying a house in 5-7 years, equity funds may be more suitable. But if the goal is to park money for a year or two, debt funds might be more appropriate.

Jatinder Pal Singh, CEO of ITI Mutual Fund, also suggested seeking professional advice early on. “Instead of jumping between equity, debt, and hybrid categories, first-time investors should consult a financial advisor who can recommend funds based on individual needs,” he said.

What are the various offerings?

Once you have identified your goal, you must understand what various mutual fund categories, such as equity, debt, and hybrid, offer. Different fund categories cater to different needs.

Equity funds tend to offer higher potential returns but are more volatile, making them ideal for long-term wealth building. Debt funds are generally considered safer and more suitable for short-term investment requirements. Hybrid funds aim to balance the two by investing in both asset classes.

Time horizon plays a key role in deciding the right type of mutual fund. Equity funds should typically be held for at least 7 years, according to Jiral Mehta, senior research analyst at FundsIndia. “This increases the odds of earning reasonable returns and reduces the risk of negative outcomes,” he said.

Debt funds come in various subcategories based on investment duration. Liquid and short-duration funds invest in instruments with maturities of three months to three years, while medium- and long-duration funds invest for five years or more. Choosing the right one depends on how long you plan to stay invested and your liquidity needs.

For those unsure about asset allocation, hybrid funds, especially dynamic asset allocation funds or balanced advantage funds, can be a good starting point. These funds automatically adjust the equity-debt mix based on market conditions, reducing the need for active management by the investor.

“If you’re a new investor and not confident about portfolio allocation, these funds offer a good middle ground,” said Mehta.

Look beyond returns

Unrealistic returns expectation is another reason first-time investors lose faith early. They often start with the belief that investing will deliver quick, consistent gains, when in reality, markets are cyclical and can test patience. "When actual returns don’t match unrealistic hopes, disappointment sets in and leads to premature exits, often working as a big wealth destroyer. It is important to remember that success comes from staying disciplined, goal-aligned, and resisting any irrational investing decisions based on emotions that one would experience in a volatile market," said Harsh Gahlaut, co-founder & CEO at FinEdge.

Therefore, once you have narrowed down the category, evaluating individual schemes is the next step. Experts suggest looking at qualitative and quantitative factors. “Don't just chase past returns. Consider the consistency of performance, the investment philosophy, how risk is managed, and whether the fund manager has a solid long-term track record,” Mehta added.