This blog presents the opinions of Mr Gajendra Kothari, the co-founder of Etica Wealth, who has built his mutual fund corpus of more than ₹50 crores while managing over ₹2000Cr of funds for his firm, Etica Wealth.

Navigating through his incredible portfolio-building journey, the blog explains all crucial aspects of Mutual Funds from investment strategies to portfolio management.

Over the last decade, the Indian mutual fund industry has grown over sixfold, driven largely by retail investors. Understanding mutual funds’ suitability for long-term goals and selecting the right schemes is crucial to navigating this landscape. Mr. Kothari’s insights provide valuable guidance for making informed investment decisions.

Are Mutual Funds Suitable for Long-Term Investors?

Mutual funds can potentially provide safety, diversification, and professional management. They also offer accessibility. Anyone can begin investing with as little as ₹500, making them suitable for a wide audience, from salaried professionals to small business owners. But should you invest in mutual funds systematically or in one go? Here’s Mr Kothari’s take:

SIP vs Lumpsum: Choosing the Right Strategy 

There are two main ways to invest in mutual funds: Systematic Investment Plans (SIPs) and lump sum investments. SIPs allow you to steadily invest small amounts on a regular schedule like monthly or quarterly over the long run. 

In contrast, with a lump sum investment, you put in a large amount simultaneously. 

  • SIPs tend to work better for most people as they enforce disciplined, regular investing which also decreases the effects of stock market ups and downs. If maintained over many years, SIPs can yield around 12-14% returns. 
  • Lump sum investing is best if you have a sizable amount to invest for 10+ years. Historical data shows the stock market tends to have positive returns 3 out of 4 years over long periods, so timing is not as important.

Pro Tip: Keep 10-20% of your funds in liquid reserves to capitalize on market dips. This approach can boost overall returns while maintaining the stability of SIPs.

After deciding between lumpsum and SIP, how to choose between different mutual fund categories.   

Which Mutual Fund Categories Should You Opt For?

Building a mutual fund portfolio requires a structured approach. A top-down view reveals three primary categories of mutual funds:

  • Debt (Fixed Income) Funds
  • Hybrid Funds (Equity + Debt)
  • Equity Funds

Each of these categories serves a specific financial purpose, making it essential to align your investment goals, risk tolerance, and time horizon with the fund type. 

Here’s a breakdown: 

1. Debt Funds: A Starting Point for Beginners

If you are new to mutual funds, debt funds are an excellent entry point. Think of them as alternatives to Fixed Deposits (FDs), offering stable returns with minimal risk.

Who Should Opt for Debt Funds?

  • Investors with a short-term goal (6 months to 3 years).
  • Risk-averse individuals looking for 6–8% returns.

Why Choose Debt Funds?

  • They let you understand how mutual funds work without significant risk.
  • You can experiment with liquidity—invest for a short duration, withdraw, and gauge the process.

2. Hybrid Funds: Balancing Risk and Return

Hybrid funds combine equity and debt for a diversified portfolio. This category also includes multi-asset funds, adding gold or silver to the mix.

Types of Hybrid Funds:

  • Conservative Hybrid Funds (more debt, less equity): 8–10% returns with reduced volatility.
  • Aggressive Hybrid Funds (more equity, less debt): 10–12% returns, but higher risk.

Who Should Opt for Hybrid Funds?

  • Investors with medium-term goals (3–5 years).
  • Those looking for better returns than debt funds without the high volatility of pure equities.

3. Equity Funds: High Risk, High Reward

Equity funds invest primarily in stocks, offering potential for higher returns (12-15%) but with significant volatility.

When to Choose Equity Funds:

  • For long-term goals (7+ years).
  • If you’re comfortable with market ups and downs.

Where to Start?

  • Index Funds (Passive Funds): Ideal for beginners, these track indices like Nifty 50, investing in India’s top 50 companies.
  • Active Equity Funds (e.g., large-cap, mid-cap, small-cap): Suitable for experienced investors with higher risk appetite.

Now, let’s focus on some of the active equity fund sub-categories. 

Understanding Equity Fund Sub-Categories

  • Large-Cap Funds: Invest in the top 100 companies (stable but moderate returns).
  • Mid-Cap Funds: Invest in companies ranked 101–250 (higher growth potential but more volatile).
  • Small-Cap Funds: Invest in smaller companies (highest risk, but can yield exceptional returns over 10+ years).
  • Flexi-Cap Funds: Flexible allocation across large, mid, and small caps.
  • Multi-Cap Funds: Mandated allocation of at least 25% in each cap, offering full-market exposure.

For those comfortable navigating market dynamics, can explore other types of equity funds. 

Advanced Equity Options for Seasoned Investors

  • Dividend Yield Funds: Focus on stable, dividend-paying companies. These are great when markets are overvalued.
  • Contra Funds: Invest in undervalued or out-of-favor sectors with potential for growth. Timing is crucial here.
  • Thematic and Sectoral Funds: Focus on specific industries or trends, like technology, healthcare, or PSU stocks.

But are thematic funds an appropriate option for all investors? 

Are Thematic Funds Good?

Over the years, thematic and sectoral funds have become increasingly popular. However, retail investors need to deal with these funds with utmost caution and awareness.

What Are Thematic and Sectoral Funds?

Sectoral Funds: Invest in a particular sector like banking, pharma, or technology.

Thematic Funds: These funds have a wider scope and operate around the theme of renewable energy, infrastructure, or digital transformation that spans sectors.

Success in sectoral funds is based on perfect timing when entering and exiting. One has to time the entry when the sector is undervalued and the exit at its peak. It requires expertise and sometimes luck. This is hard for retail investors to navigate. Also, thematic funds are highly volatile since they are concentrated in a single sector or theme.

Many investors are drawn to thematic funds by past performance. For example, seeing a sector fund deliver 100% returns in a year can create FOMO. However, such returns are often unsustainable, and the same fund could deliver negative returns in the following year.

For those investors who are interested in thematic funds but fear the risk, business cycle funds or thematic fund of funds is a safer route.

An Alternative: Business Cycle or Thematic Fund of Funds

These funds spread investments across multiple sectors. Fund managers strategically allocate capital to underperforming sectors with the potential for a turnaround, while rotating out of overvalued sectors.

For example, if the pharma sector is underperforming, the fund may allocate capital there. Once the sector recovers, it reallocates funds to another undervalued sector, ensuring continuous growth potential without investor intervention. Fund managers handle the timing of sector entries and exits, reducing investor stress. 

Moreover, investors can also invest through a primary issue which is known as New Fund Offer (NFO).

Investing in NFOs

NFOs are a double-edged sword and can be risky for investors. In case of availability of a similar category or sector scheme in the market, NFOs can be avoided. Some prominent reasons behind the same are:

  • No proven track record and
  • Potentially higher expense ratio due to lower fund size.

NFOs with highly convincing objectives and the best of all characteristics may be an investment option for retail investors. However, the inherent risks of NFOs can make it a skeptical investment.

Amidst these different investment options, portfolio selection and balancing is crucial.

How to Select the Right Mutual Funds?

The mutual fund universe has a diverse range of categories. Investors willing to navigate through these categories can start by selecting one fund/category at a time and moving to active investing gradually. However, there can be various parts to this process such as clarifying the investment focus and evaluating the qualitative and quantitative metrics.

Investment Preference

Investors can start by narrowing down their own investment preference. There are plenty schemes in the market, but they can be filtered down in the following format to reach the niche preference:

  • Asset Allocation – Investors need to check their portfolio, assess the existing and required exposure and then plan which category to invest in.
  • Geography – It is important to decide the preferred country for investment as the market can be significantly affected by the country’s economic trajectory.
  • Sector – It can be decided based on the investor’s existing exposure, country’s economic situation, and particular sector performance.
  • Market Capitalisation – It is crucial to assess market cap or category that has potential scope to perform well.

Every scheme has a lifecycle and assessing the same is crucial to identify this scope. A fund performing better in the past 3-4 years may have extinguished its scope. 

Apart from personal preference, investors need to assess some quantitative and qualitative measures.

Quantitative Metrics: Tale of Cost, Returns and Volatility!

Amidst all the chaos of different mutual fund schemes in the market, segregating the controllable and non-controllable factors while selecting the right mutual funds can simplify the process.

The factors that can be controlled are:

  1. Risk: It can be assessed by the Riskometer presented by the Securities Exchange Board of India (SEBI). It is available on the scheme’s website, prospectus, reports, etc. The figure indicates the level of risk in a scheme from low to high range based on factors like market cap, volatility, and liquidity.
  2. Costs: The Total Expense Ratio (TER) is denoted as % of total fund assets. It is the annual cost paid by investors for investing in that particular scheme. TER in the range of category TER can be ideal.

There are two main plans in mutual funds – Regular and Direct. The former requires the advisor role and thus requires a higher cost than the latter.

However, the variations in these costs can not become the sole base for selection. A scheme with a good fund manager and higher cost can be a better alternative to a scheme with a bad fund manager and lower cost.

Apart from this, an uncontrollable aspect is returns, which is considered to be the sole performance indicator by many investors. Some of the best metrics for the quantitative assessment of a scheme’s performance are: 

  1. Rolling Returns: It calculates the average of 5-year returns for every day in the required timeframe. Rolling returns help average the volatility to showcase the potential consistency in the management. For example, while calculating returns from 2010 to present, multiple data frames will be collected and the volatility will be averaged out. These data frames can be:
  • January 1, 2010 to January 1, 2015
  • January 2, 2010 to January 2, 2015
  • January 3, 2010 to January 3, 2015 and so on.
  1. Sharpe Ratio: It indicates risk-adjusted returns or returns generated per unit of risk. Therefore, this ratio is suitable when it is higher.
  1. Standard Deviation: This metric can help understand the volatility of a fund. The standard deviation and volatility are directly related.
  1. Benchmark: In an active fund, investors can analyse the fund’s performance in comparison with its benchmark. If a fund has not performed better than its benchmark, despite a whole economic cycle of 7-8 years, then it may not be a profitable investment. This performance is calculated by Alpha. Alpha of 0.5% or 1% is considered to be a good sign.

Investors usually compare fund performance with category returns. However, benchmark outperformance is a better metric.

Along with these metrics, assessing the qualitative factors of a scheme can provide the holistics overview for selection. 

Qualitative Metrics: Assessing the Fund Manager

A prominent qualitative factor is Fund Manager’s Profile. Usually, managers with longer tenure can potentially manage funds better due to their experience. Investors can also analyse how the manager has performed in good or bad market periods. One can get these details from the fund house website or from SEBI.

Investors can know more about the fund manager’s profile from Morningstar website or the person’s interviews on social media. It will help them understand the professional’s approach towards their investment. A fund manager with good investment style but underperformance can pave a potential investment opportunity.

However, these metrics may fall short in case of New Fund Offer (NFO) due to absence of historical information. 

How Many Funds Should You Have in Your Portfolio?

It can be one of the most common dilemmas for investors. Diversification is usually preferred and advised by many, but focusing on some specific funds can potentially strengthen the investment game. Therefore, having around 4-5 funds in a portfolio can be a suitable stance.

It will reduce the investor’s efforts and provide the opportunity to focus on the best schemes. Moreover, investors can track the good fund managers in India and invest accordingly. It will help them concentrate their assets to the best professionals.

However, balancing the portfolio is accompanied by assessing the asset allocation. It can be done efficiently through these easy tips:

  1. Start with investment goals or objectives while investing.
  2. Know your preferences of assets.
  3. Do not complicate the allocation. Stay clear about assets like having 4-5 funds in the folio and allocating to debt funds for goals up to 3 years, hybrid for goals up to 3 to 5 years and equity for goals more than 5 years.

Similar to the investing process, investors should also be prepared for exiting the funds based on proper analysis rather than mere intuitions.

Planning the Mutual Fund Exit

The exit strategy may differ based on the category. Some of these strategies or times for planning the exits are explained here:

  • One can withdraw their funds post the achievement of goals.
  • Complete the asset-specific investment period before withdrawal. For example, it is better to withdraw equity funds after a minimum of 10 years investment.
  • Based on all the major metrics, investment has outperformed the expectations and is in the peak of its lifecycle.

Exiting mutual funds may attract some taxes or exit loads. To manage them, investors should analyse their portfolio position and if possible allocate major investments for the long-term. 

Systematic Withdrawal Plans or SWPs are a popular strategy for gradual exit. SWPs can be used when there is a need for monthly income. However, till the utter need of the investor, one should not make frequent entry-exits from the funds.

Sometimes, when funds are underperforming, despite disciplined analysis while investing, investors may make emotional decisions for withdrawing the funds. However, patience is the key. The market can potentially provide the desired performance in the long-term, which can become a huge benefit to investors.

Despite all these factors, underperforming investments can be a worrying matter for many investors.

How to Manage When the Fund is Underperforming?

To combat the situation of underperforming investment, investors should remember that the market may catch up late, but can potentially provide the returns in the long-term. Moreover, one should analyse the broader picture of whether investment has fulfilled their objectives or provided at least minimum returns above other investment instruments. It can help investors maintain the required patience through the investment journey.

However, apart from these intricate details, there are numerous mistakes that investors can make while doing mutual fund investments. 

Top Mistakes to Avoid in Mutual Fund Investing

Mr Kothari identifies three key emotional pitfalls that hinder wealth creation:

  • Greed, Stupidity and Fear: Investors often buy funds performing well (greed) and sell during downturns (fear), leading to suboptimal returns.
  • FOMO (Fear of Missing Out): Comparing returns with peers can lead to impulsive decisions. Stick to your plan and goals.
  • Instant Results, Short-Term Focus: Wealth creation requires patience. Expecting instant results often leads to frequent portfolio changes, undermining long-term growth.

A golden rule: Buy low, sell high. Yet, most investors do the opposite, driven by emotions.

Takeaways

Wealth creation isn’t just about numbers—it’s about mindset. Emotional discipline, achieved through SIPs or guided strategies, ensures you stay invested during market fluctuations.

For retail investors, the mantra is clear:

  • Start early.
  • Stay disciplined.
  • Ignore the noise of the market and trust the process.
  • Keep a contrarian approach and do not just follow the crowd.

Analysing the personal preference, quantitative and qualitative metrics and keeping the investment simpler can help investors successfully sail through the roller-coaster journey. 

Mr Kothari emphasises, “My wealth wasn’t built through genius; it was my SIPs doing the work silently”

Watch the detailed video to learn more