New to mutual funds? Experts suggest using 50-30-20 rule to build a smart investment strategy

For many first-time investors, entering the mutual fund world can feel overwhelming. With constant market updates, social media opinions, and thousands of schemes available across equity, debt, and hybrid categories, investors often struggle to identify where to start and how to build the right portfolio. Financial planners say the key is to focus less on market noise and more on personal goals, risk appetite, and investment horizon.

A similar query came from Ms Saluja, a viewer of The Money Show on ETNow, who wants to know about mutual funds so that she can have some changes done in her existing portfolio and invest rightly.

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According to Nisreen Mamaji, MoneyWorks Financial Services, before making any changes to an existing mutual fund portfolio, investors should first understand the basics of their own financial journey. Questions such as how long the money will remain invested, what the financial goals are, and how much market volatility one is comfortable with are more important than simply chasing returns or switching funds frequently.

“The question is not that do I need to change my mutual funds or are they fine, a more basic question is how long am I investing for, what are my goals, am I comfortable with some amount of volatility if I am invested in the equity markets,” Nisreen said.

She further said to get answers for what is my risk tolerance? What is my investable surplus and where do I see myself five years down the line as far as my salary is concerned.

The investment horizon plays a major role in deciding asset allocation. For short-term goals of one to three years, investors should limit equity exposure to around 30% and rely more on debt-oriented products. For medium-term goals of three to five years, equity allocation can range between 30% and 60%. Investors with horizons beyond five to seven years can consider a higher allocation towards equities for long-term wealth creation.

Nisreen pointed out that many investors make the mistake of choosing high-risk funds like mid-cap or small-cap schemes for short-term goals, which can lead to disappointment during volatile phases. Instead, investors should ensure that the fund category matches the time horizon and risk profile of the goal.

For beginners, starting with relatively stable categories such as large-cap or index funds may be a better approach. These funds help investors gradually understand market fluctuations and build confidence before moving towards riskier segments such as mid-caps, small-caps, thematic, or sectoral funds.

She also cautioned against holding too many schemes within the same category, as this can create unnecessary overlap without improving diversification. Ideally, investors should limit themselves to one or two funds per category and avoid making frequent changes based on short-term market movements.

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Hybrid and dynamic asset allocation funds can also help first-time investors navigate volatility more comfortably. Categories such as balanced advantage funds, equity savings funds, and dynamic asset allocation funds automatically adjust exposure between equity, debt, and arbitrage depending on market conditions, helping smoothen the investment journey.

When it comes to personal finance discipline, Nisreen suggested following a simple 50-30-20 rule. Around 50% of income can go towards essential expenses, 30% towards discretionary spending, and 20% towards savings and investments for future goals.

One of the biggest mistakes investors make, she said, is reacting emotionally to market corrections. Many stop SIPs or redeem investments when markets fall, even though such phases often provide better opportunities for rupee cost averaging. Staying invested and continuing SIPs during corrections can help lower average costs over the long term.

She also advised investors to avoid being influenced by constant market chatter or social media recommendations. Once a strategy is created based on financial goals and risk profile, investors should remain committed to it rather than making tactical changes frequently. Reviewing the portfolio periodically is important, but changes should generally not be made too quickly.

For long-term equity funds, investors should ideally give fund managers at least three years to demonstrate performance before considering major portfolio changes. According to Nisreen, successful investing is often less about timing the market and more about spending enough time in the market with a disciplined and consistent approach.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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