Starting your MF journey this Diwali? Experts suggest adding flexicap, midcap funds & avoiding overlapping schemes

Diwali is considered an auspicious time to begin new investments, and many people use the festive occasion to take their first steps towards financial planning. For those looking to enter the mutual fund market, however, choosing from a wide range of fund categories and deciding how much to invest can be confusing.

Market experts recommend that beginners start with a diversified mutual fund portfolio based on their financial goals, risk appetite and investment horizon. While flexi-cap and large-cap funds can be suitable starting points, investors can also consider mid-cap, small-cap and other diversified fund categories depending on their risk profile.

Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance shared with ETMutualFunds that beginners can start with a flexi-cap or broad-market index fund instead of building multiple portfolios with several funds. He further said that large-cap and hybrid funds are also suitable options.


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Mukesh Kumawat, Executive Director, Anand Rathi Wealth Limited told ETMutualFunds that the choice of mutual fund categories should depend on an investor's financial goals, investment horizon, ability to take risks and for first-time investors looking to build long-term wealth, he believes that actively managed equity mutual funds are a good starting point.

Kumawat recommended investing across 8-10 diversified equity fund categories, with 50-55% allocation to large caps, 20-25% to mid caps and the remaining to small caps. He said investors should look beyond large-cap and flexi-cap funds and consider mid-cap, small-cap, multi-cap and other strategy-oriented categories to seek higher returns than the Nifty 50.

He further suggested avoiding index funds as they simply track an index rather than aim to outperform it. Hybrid funds may also not be ideal for investors who want greater control over their asset allocation, as the equity-debt mix is decided by the fund manager.

Matching fund choices with risk appetite and investment horizon

There are various mutual fund categories available for investment with each category serving different objectives. With different options available, investors should first assess their financial goals, investment horizon and risk tolerance before deciding how much to allocate to equity and debt mutual funds as these two asset classes serve different purposes in a portfolio.

Kumawat said that the allocation between equity and debt is important because they serve different purposes and for medium-term goals of two to five years, investors can consider allocating 60-70% to equity and 30-40% to debt.

For longer investment horizons of over five years, an 80:20 equity-to-debt allocation would be appropriate, one can consider investing 50% of their debt allocation in gold ETFs and investors need to maintain separate equity and debt allocations rather than opt for hybrid funds, as this gives them greater control over how their money is allocated, he further said.

Minocha said that first investors should determine their investment time horizon and risk tolerance. If the goals are more than seven years away, consider a larger equity allocation. Otherwise, choose hybrid or debt funds and the ability to stay invested during market corrections is more important than stated risk tolerance.

SIP or lumpsum: Which investment route should beginners choose?

Systematic investment plans (SIPs) can help first-time investors develop financial discipline and avoid the need to time the market. They also allow investors to spread their investments across different market levels.

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Minocha said Systematic investment plans (SIPs) help first-time investors build discipline and reduce the need for market timing, avoid chasing past performance, as this rarely leads to consistent long-term results and instead, select funds based on your goals, the fund’s role in your portfolio, risk, and consistency.

Kumawat said for first-time investors, SIPs are a good way to start as they encourage regular investing and help spread investments across market levels, lumpsum investments may suit those with surplus funds and a longer horizon. If markets are near their peaks, investors can park the money in a money market fund and gradually transfer it to equity funds through an STP over four to six weeks and in the current market scenario, with markets below their peaks, direct lumpsum investments may also be considered.

He further said that common mistakes include investing without clear goals, holding too many similar funds, taking excessive risks, stopping SIPs during market corrections and chasing recent top performers and investors should therefore assess funds on their performance against benchmarks and peers across different periods and market cycles.

How often to review your portfolio and when to switch or stop SIP?

Mutual fund inventors have the habit of reviewing their portfolio regularly and taking the action on their mutual fund portfolios. Now the question comes if you are a first time investor, how often should one review their portfolios.

Kumawat said that investors should review their mutual fund portfolios once every six months or at least once a year, the review should focus on whether the funds have performed consistently against their benchmarks and category peers over different time periods, and whether they continue to fit the investor's financial goals and asset allocation.

He further said that a fund's short-term underperformance should not be a reason to exit or stop an SIP, investors should consider switching only when a fund has consistently underperformed its benchmark and peers over three to four years, or when there are significant changes in its investment strategy, fund manager, or portfolio. SIPs should ideally continue through market corrections, as stopping them during periods of volatility means missing the opportunity to accumulate more units at lower prices, which can affect long-term wealth creation.

Minocha said that most investors need only a semi-annual or annual review. Continue SIPs even during market declines to maintain regular investment. Reassess your portfolio only if your strategy or goals change, not in response to short-term performance

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Simple mutual fund portfolio for a 5-to-7-year horizon

Market experts also recommend holding investment for at least five to seven years. So if the first time investor holds the investments for at least five to seven years, what will be the simple mutual fund portfolio?

Minocha said he does not recommend holding no more than five funds. For example, allocate 50-60% to a flexi-cap or diversified equity fund, 20-30% to a large-cap or index fund, and the remainder to a hybrid or debt instrument based on your risk tolerance.

Kumanwat said that for a first-time investor with a moderate risk appetite and an investment horizon of five to seven years, allocating 70-80% of the portfolio to equity and the remaining 20-30% to debt. “Within the equity allocation, investors can maintain 50-55% exposure to large caps, 20-25% to mid caps, and the remaining allocation to small caps. They can also consider investing 50% of their debt allocation in gold ETFs.”

He further said that investors can build this portfolio through 5-7 actively managed funds across large-cap, mid-cap, small-cap, flexi-cap, and multi-cap categories, depending on their desired allocation. The idea is to maintain adequate diversification without adding too many funds with similar underlying portfolios

(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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