Equity Mutual Funds — Part 2: Your First Fund

If you haven't read Part 1, I'd recommend starting there to understand the basics of equity mutual funds, their types, and why SIP matters.

Now comes the question everyone asks: "Which fund should I invest in?"

And here's where most people go wrong. Not because they pick a "bad" fund, but because they pick funds for the wrong reasons.

The Scene I've Seen Too Many Times

A friend decides to start investing. Within a week, their portfolio looks like this:

• One mid-cap fund (because it topped some list)
• One small-cap fund (because someone on YouTube said "wealth creation")
• One sectoral fund in IT (because tech is the future)
• One thematic fund in manufacturing (because "Make in India")
• One international fund (because diversification)
• One ELSS (because tax saving)

Six funds. Six SIPs of ₹2,000 each. Total confusion about what each one does.

Three years later, they've stopped half the SIPs, switched two funds after a bad quarter, and have no idea if they're actually making progress.

This is not investing. This is collecting.

What Your First Mutual Fund Should Do

Your first equity mutual fund has a very simple job:

1. Give you broad exposure to the equity market — not to one sector, not to one theme, but to the market as a whole.

2. Reduce the chances of a nasty surprise — you shouldn't wake up one day to find your entire investment down 40% because one sector crashed.

3. Help you build the habit of investing — month after month, year after year, without drama.

Think of it as learning to drive. You don't start by racing on mountain roads in the rain. You start on a flat, empty road where mistakes don't kill you.

Your first fund should be boring in the best way possible.

Good Choices for Your First Fund

Here are fund types that work well as a starting point:

1. Flexi-Cap Fund

• Invests across large, mid, and small-cap stocks
• Fund manager decides the mix based on market conditions
• Diversified by design
• Good for: Most beginners

2. Large-Cap Fund

• Invests primarily in the top 100 companies
• More stable, less volatile
• Returns may be slightly lower, but so is the stress
• Good for: Conservative first-time investors

3. Large & Mid-Cap Fund

• Mandatory allocation to both large and mid-caps
• Balance between stability and growth potential
• Good for: Investors okay with moderate volatility

4. Index Fund (Nifty 50 / Sensex / Nifty 500)

• Simply mirrors an index — no fund manager decisions
• Very low cost
• You get market returns, nothing more, nothing less
• Good for: Believers in passive investing, cost-conscious investors

5. Aggressive Hybrid Fund

• Mix of equity (65-80%) and debt (20-35%)
• Built-in cushion during market falls
• Slightly lower returns but much smoother ride
• Good for: Nervous first-timers who want equity exposure with training wheels

Why "Hot" Funds Are a Terrible Starting Point

Let me tell you how most people choose funds:

1. Open an app or website
2. Sort by "1-year returns"
3. Pick the top 3
4. Feel smart

Here's the problem: Yesterday's winner is often tomorrow's disappointment.

Funds that top the charts usually do so because:

• They took concentrated bets that happened to work out
• Their sector or theme had a great run
• They rode a momentum wave that's about to end

When you buy them, you're essentially buying after the party is over.

Let me show you with a real pattern (not specific fund names, but this happens repeatedly):

The sectoral fund looked amazing in 2021. People piled in. Then 2022 happened. Many panicked and sold at a loss. The boring flexi-cap fund didn't make headlines, but investors who stuck with it did better over the full period.

The fund didn't fail. The timing did.

What Actually Makes a Fund "Good"?

Here's where I want to challenge your thinking. A "good" fund is NOT:

• The one with highest returns last year
• The one with a celebrity fund manager
• The one with the most ads
• The one your colleague recommended at lunch

A good fund is one that:

1. You Can Stick With

This is the most underrated quality. If a fund falls 25% and you panic-sell, it doesn't matter how good its long-term track record is.

2. Has a Reasonable Long-Term Track Record

Don't look at 1-year returns. Look at 5-year, 7-year, 10-year returns. Has the fund consistently beaten its benchmark? Has it stayed in the top half of its category most years?

A fund that's occasionally #1 and occasionally #40 is exhausting. A fund that's usually between #5 and #15 is boring — and that boring consistency builds wealth.

3. Doesn't Take Crazy Risks

Look at how the fund behaved during bad times — March 2020 (COVID crash), 2018, 2015-16. Did it fall much more than its peers? Did it take longer to recover?

A fund that protects reasonably well during crashes is more valuable than one that shoots up during bull runs but collapses when things go wrong.

4. Has Reasonable Costs

Two funds can look identical, but one quietly eats more of your returns through higher expense ratios. Over 20 years, a 0.5% difference in expense ratio compounds into lakhs.

Check the expense ratio. For actively managed equity funds, anything above 2% should make you pause. For index funds, even 0.5% is high — good ones charge 0.1-0.2%.

5. Has a Stable Process

Is the fund manager changing every year? Is the fund's strategy shifting based on whatever's trending? That's a red flag.

Good fund houses have clear investment philosophies that don't change with the wind. You want a fund where the process is consistent, even if the manager changes.

The One Question Your Fund Should Answer

Before adding any fund to your portfolio, ask:

"If I remove this fund, what important job will stop getting done?"

If the answer is "nothing much" — you don't need that fund.

Your first fund's job is simple: Be your primary vehicle for equity wealth creation. That's it. It doesn't need to be exciting. It doesn't need to top charts. It needs to show up, year after year, and do its job.

How Many Funds Do You Need?

In your first 2-3 years of investing?

One or two. That's it.

I know this sounds too simple. Your brain wants more action. "But what about diversification?" you ask.

Here's the truth: If you own one well-diversified flexi-cap fund, you already own 50-70 stocks across multiple sectors and market caps. Adding four more equity funds often means you own the same 30 stocks five times over with extra paperwork.

Start with one solid core fund. Run your SIP for 2-3 years. Learn how markets move. Understand how you react when your portfolio falls 15%. Build the habit.

Then, if needed, you can add a second fund with a slightly different style or a small satellite allocation. But don't rush this.

A Simple Framework to Pick Your First Fund

If you want a practical approach, here's a 5-step shortcut:

Step 1: Pick the Right Category First

Based on your time horizon and risk comfort:

Don't pick the fund first and worry about category later. Category first, always.

Step 2: Look at Long-Term Returns (5-10 years)

Filter for funds that have:

• Beaten their benchmark over long periods
• Stayed above category average consistently
• Not just had one or two great years

Step 3: Check Consistency Across Years

Look at calendar year performance. How many years in the last 10 did the fund beat its benchmark? A fund that beats its benchmark 7-8 years out of 10 is more reliable than one that crushed it for 2 years and lagged for 8.

Step 4: See How It Behaved in Bad Times

Check March 2020, or any other significant fall. Did the fund fall much more than peers? How long did it take to recover? Downside protection matters.

Step 5: Check Costs and Basics

• Expense ratio reasonable?
• Fund size not too small (below ₹500 crore can be a concern) or absurdly large?
• Fund manager been around for a while?
• AMC has a decent reputation?

What About Direct vs Regular?

Quick reminder from Part 1:

• Direct Plan: No distributor commission, lower expense ratio
• Regular Plan: Includes commission, higher expense ratio

For your first fund, if you can invest on your own through apps like Kuvera, Groww, or AMC websites, go Direct. The cost savings compound significantly over time.

If you genuinely need an advisor's help to stay disciplined, Regular is fine — just know you're paying for it.

The Hardest Part: Doing Nothing

Once you've picked a good fund and started your SIP, here comes the hardest part:

Doing nothing.

You'll see other funds doing better. You'll read articles about "hot new themes." Your friend will brag about some fund that gave 50% last year. Your app will send notifications about "top performers."

Ignore all of it.

Your job is not to find the best fund every year. Your job is to stay invested in a sensible fund for a decade or more. The fund you barely talk about, the SIP you forgot you have — that's often the one that does most of the work.

Key Takeaways from Part 2

1. Your first fund should be boring — flexi-cap, large-cap, or index. Not sectoral, not thematic, not small-cap.

2. Don't chase last year's winners. Yesterday's top performer is often tomorrow's disappointment.

3. A "good" fund is one you can stick with through ups and downs. Temperament matters more than optimization.

4. One or two funds are enough for the first few years. More funds often means more confusion, not more diversification.

5. Use a simple framework: Right category → Long-term track record → Consistency → Downside behavior → Costs.

6. The hardest part is doing nothing. Once you've picked, stay the course.

Coming Up in Part 3

Now you know how to pick your first fund. But eventually, you'll want to build a proper portfolio. How do you go from one fund to a complete, sensible portfolio without creating a mess?

Part 3 will cover:

• The core-satellite approach
• When (and why) to add more funds
• How to avoid the overlap trap
• What a clean 4-6 fund portfolio looks like
• The one question that identifies clutter

To be continued...