How To Invest In Mutual Fund In 2025?

 What are the mistakes that investors often make while selecting mutual funds? How can you avoid these mistakes? And in the coming year, which mutual funds will be right? We will know in this video. But before that, a story about Peter Lynch. Maybe you have never heard of him, but he is a very famous person in the world of investing.

In 1977, Peter Lynch started managing a mutual fund called Magellan Fund. And until 1990, he ran that fund for 13 years. When he started managing this fund, the size of that fund was around 4 to 6 billion dollars.

When he retired in 1990, the size of this fund was 14 billion dollars. And to give you a sense of how this translates into annual rate of return, it was an absolutely unbelievable number. Of 29.22% every year.

For 13 years, Peter Lynch's managed fund gave a growth of 29.22% every year. But there was a very interesting study. It was tried to find out that when the fund was performing so well, then how was the performance of the people invested in that fund? And as a result, people were fed up.

There were a lot of people who had lost money in the Magellan Fund. There were a lot of people who did not earn anywhere near 29% per year. And you will think, how is this possible? For 13 years, that person fought and increased this fund by 28 times.

Gave an average return of 29% every year. So who are those people and how was their return low or negative? Because they tried to time this fund. Because they panicked in this fund.

It's a matter of 1980, for example. Magellan Fund had given 80% return in one year. So a lot of people went in.

But in 1981, this fund did not even beat the index. It underperformed. So what did people do? This was nonsense.

They took out the money. If they had kept the money, then the same money would have been at least 20 times. And this is the biggest mistake of every person.

When you look at the performance of the Mutual Fund, So you see 1 year performance, 3 year performance, 5 year performance. But on an average, do you know the duration of an Indian investor's SIP? 2.4 years. Not even 2.5 years.

So looking at the performance of Mutual Fund for 3 years and 5 years, you will be very happy. But you will not be able to commit that much. Because you panic.

And that's clearly happening right now as well. I am shooting this video in November 2024. In the last 3 years, there has been a blind return in the market.

Everyone thinks that he is a rock star. Everyone thinks that he can earn a lot of money in the stock market. But in the last 2 months, the boat has started sinking.

Sanity has started coming. The market is not that strong. In fact, a lot of people are predicting that the market is going to fall even more than this.

And every person who has entered the market in the last 6 months after seeing the last 3 years, is panicking now. He is taking out his money. And they may miss out on what could be a potential bull run for the next 10-20 years.

What Mistake Where done?

1. Focusing only on past performance. You must have often seen in the ads of Mutual Fund that past performance is not reflective or indicative of future performance. And this is true.

This is not just a saying. It has actually happened several times. Let's take India in 2018.

HSBC's Mid Cap Fund. There is no doubt about HSBC. It's a wonderful bank and they have done really well.

But this one example is factual. In 2018, HSBC ranked number 1 in Mid Cap Fund in terms of performance. In 2019, its rank fell to 9th.

In 2020, its performance fell further and it only gave a return of 2%. In 2021, HSBC Mid Cap Fund was ranked amongst the lowest of all Mid Cap Funds. So clearly, if you rely only on past performance, it will not necessarily translate into future performance.

2.    Over diversification. This is very funny. In Money Matters, I often see that people have either not invested in Mutual Funds or have invested a lot.

7, 8, 11, 13 Mutual Funds. 500, 1000, 1500. What they don't realize is Mutual Fund is not a stock.

Mutual Fund is a portfolio of stocks. For example, if you have invested in Nifty 50, which is one of India's top 50 companies, through an index fund. And if you have taken a large cap Mutual Fund, whose name is not Nifty 50, but it is a large cap Mutual Fund, which means it is investing in India's biggest companies.

So it is quite possible that the first Mutual Fund and the second Mutual Fund have different names but they are more or less investing in the same companies. Yes, the weightage will be different, that how much this company is buying and how much that company is buying. But your exposure to the same company still exists.

The same thing can happen if you are taking a mid-cap, and you have taken 5-6 mid-caps. Or you have taken a mid-cap somewhere, you have taken a thematic somewhere, but there is so much overlap in it. Recognize that Mutual Funds invest in a portfolio of stocks.

And if you have taken 2, 3, or 4 such Mutual Funds, which are investing in the same companies, your exposure will be more or less the same. So that diversification is not managing your risk. It is just giving you an emotional feeling that you have managed your risk.

The right way, in my opinion, is to focus on 2, 3, or maximum 4 themes. My personal choice is 1 large cap, 1 mid-cap or flexi-cap, and 1 small cap. Its percentage can change according to your risk.

So if you are very young, you could go for 30% large cap, 30% mid-cap, and 40% small cap because you can play for a long time and take more risk. But if you are in your 40s, then you should be 50-60% large cap, 30% mid-cap, and only about 10-20% small cap because there is more risk in small cap. And at your age, you should not take that risk with responsibilities.

So don't over-diversify on Mutual Funds. Pick your risk profile and invest in 3, maximum 4 Mutual Funds.

3. I am also a part of this mistake. then I am. And that is to assume that when I say that Nifty 50 will give 12% risk in 10-20 years, then you think that every year, continuously, in a disciplined fashion, it will give 12% risk with full dedication. That's not how it happens.

That 12% is averaged out over a period of time. So some years it will be 6%, some years it will be 15%, some years it will be negative 5%, some years it will be 25%. It will vary.

That is the nature of the stock market. But over a period of time, if you average it out, you will get to a tight range of say about 12% or 11.5% to 12.5% if you take historical numbers. Now maybe people understand this too.

But what they make a mistake around is, for the short term, they invest in Equity Mutual Funds. Assuming that Equity Mutual Funds will give the same consistent return that you think you should get. So you have to park your 1-2 years worth of money somewhere.

And you are like, let's invest in Nifty 50 Mutual Funds. We will get 12%. No bro, that's not how it works.

It's possible that the market falls by 8% or 12%. And the money that you actually needed in the next 1-2 years, the money that you actually needed, there was no variability in it, there was no ambiguity in it, the money that you actually needed, suddenly goes out. And it's even less than the principal.

So please don't ever make the mistake that the money that you need within 3 years, invest it in Equity Mutual Funds. The right place to park that is say a Debt Mutual Fund. What is a Debt Mutual Fund? Just like there is Equity Mutual Fund, there are Debt Mutual Funds.

Those Mutual Funds that invest in Debt or Fixed Rate of Return Instruments. They can be Corporate Bonds, Fixed Deposits, Government Treasuries. It's a combination thereof.

Just like they are buying stocks, they will also buy Fixed Rate of Return Assets. Varying levels of risk. And you will get more or less a consistent rate of return.

It will be much lower than the stock market return. But within 1-3 years, at least predictability will be very high. Then your money will be safe or secure.

It will be protected. Protect the money in the short term. Grow the money in the long term.

 4.   Being very active with your portfolio. What does very active mean? In fact, I will go a little broad based. But firstly, let me explain what is very active.

Very active means, just like we are seeing our stock performance every day. We are seeing the performance of Mutual Funds. And if there is a dip, then we are selling.

If we get more money, then we are buying. Every week or two, we are rebalancing. That this is decreasing, this is increasing.

We have got some news here. Let's time the market here. Something is going to happen here.

You are just so active as if it is your daily job. But it is not your daily job. You are not a professional trader or investor.

You are a passive long term investor. And their nature should be very different from a professional investor. So I often say this.

Please be active on your income. And be passive on your investments. Get active with your income.

Get passive with your investments. What do I mean by that? Where can we make money from? Not just your job. But some side hustle.

Some business. Writing a book. Creating some music.

Creating some artwork. Creating some intellectual property. Doing freelancing.

Get active with all these things. Learn. Apply yourself.

Do cold emails. Do networking. Make as much money as you can.

And be active with those income sources. And when you make that money. To invest it.

Be passive. And passive means. Put it.

And for 10-15 years. If you have put it right. Forget it.

And that is why I often say. To run after stocks. Reduce it.

Don't close it. Reduce it. Because stocks will go up and down.

Sometimes the company goes up. Sometimes it doesn't. Some regulations came.

Some markets went down. Some other competitors came. Some pricing war happened.

But the job of mutual funds. Is to manage this thing. So if there is a fund manager.

His job is. This company is sinking. So put this company.

This company is doing well. So remove this company. They will do all of that.

You don't have to actively manage that. But you are passively invested in it. So active with your income.

Passive with your investment. Please don't make this mistake. That in your mutual fund investments.

Or in long term investments. Become so passive. That you lose sleep at night.

And while giving short term capital gain tax. Lose all the returns.

 

5. It is a very interesting mistake.

To select such a mutual fund. Which is very big. Because we think.

If it is very big. Then it will be very good too.

Especially on small cap. Small cap mutual funds. In the last 3 years.

Have increased like madness in India. Like on an average. Some funds have given.

35-40% returns per year. So people have got addicted. But bigger thing what has happened is.

That small sized companies. The valuation has increased a lot. They are not making so much revenue.

They are not making so much profit. They are not making so much growth profit. As their valuation has increased.

Now why does that matter? It matters because. If you put more money. In a very big small cap fund.

What is their mandate? Whatever money they get. Through SIP. Through lump sums.

They have to invest that. They can't keep that money in their bank. Because they can do that now too.

They have promised you a return. So they have to deploy that money. But where can they deploy? Only in those small companies.

There are not so many companies. There is no good quality. There is no revenue growth.

There is no profit growth. So by putting more money. In a highly priced company.

There won't be much return. In fact there will be more risk. And that will mean.

At some point the size of the fund. Has become the reason. Why it will not perform.

Because. The more they take exposure. In those small companies.

The more. If those companies. If something happens to them.

Or the small cap industry. It's not the industry. But the small cap segment.

If something happens. Then this fund will come crashing down. And that is why.

It is very important. Not only large cap. Or mid cap.

And especially small cap. I have not run after AUM. Or Assets Under Management.

The size of the fund. Should not be the only determinant. For how you select a mutual fund.

Now keeping these mistakes in mind. If you want to start your. Mutual fund journey in 2025.

Or if in 2025. You want to attach a new mutual fund. To your investment.

So what should be the things. You bear in mind. First let's cover the fundamentals.

Of mutual funds. Whenever you invest in a mutual fund. Then you should know.

About some expenses. First of all. It's called expense ratio.

ER. What is expense ratio? Mutual fund. Is not doing this for free.

You have to earn money. Now how do they earn? They earn. They earn.

From. This. Really cool thing.

Called expense ratio. And expense ratio is. A percentage.

Of the total investment. Which they put for their expenses. So suppose.

If the expense ratio. Is 1%. It means.

If you invest Rs.100. Then Rs.99 will be invested. Rs.1. They will keep for their expenses. And why does.

Such a small percentage. Make a difference. Why? Because they are getting thousands.

And lakhs of crores. SSIP. Lumsum etc.

So its 1%. Can also be a very big amount. Because the team.

Is not that big. So this is expense number 1. Expense number 2 is. On exit.

Means. When you sell. This mutual fund.

If you sell this mutual fund. Then maybe. You have to give a penalty.

Called the exit load. This is mostly. Within a year.

That if you sell. Within a year. Then you have to give.

Some penalty. It can be 0.5%. It can be 1%. It can be more.

Many mutual funds. After a year. Do not keep any exit load.

There are many mutual funds. Which do not keep. Whether.

You sell. In 1 month or 3 months. And if something happens.

They keep more than a year. Exit load. Is the second cost.

The third expense. Is not related to the mutual fund. But.

When you sell the mutual fund. Then. It is related to your taxation.

It is called. Capital gain tax. Capital gain tax.

Capital gain. Capital gain. Means profit.

You bought something for 100 rupees. You sold it for 150 rupees. So you had a profit of 50 rupees.

You have to pay tax on this. If you. Within a year.

Bought. And sold. So.

Irrespective of. How much. Profit did you earn.

You have to pay. Its 20%. Or 20%.

Tax. It is called short term. Capital gain tax.

If you sell. After a year. And your profit.

Is more than. 1.25 lakhs. Then.

You have to pay. 12.5% tax. On the profit.

That is called. Long term. Capital gain tax.

These three expenses. Come under your mutual fund. Your expense ratio.

Exit load. And capital gain tax. Now.

Keeping this in mind. If you. Want to buy.

A mutual fund. Or. Want to invest in it.

So the first thing. Look at the expense ratio. If you.

Want to invest. Exit load. If you don't have.

It is good. If you have less. It is good.

And that is why. Index mutual fund. Is a very big option.

What is index mutual fund? Those mutual funds. Which are tracking. An index.

What is index? Predetermined. Portfolio. Of stocks.

For example. Nifty 50. Is an index.

Run by the. National stock exchange. Which tells.

That India's. Top 50 companies. National stock exchange.

Their. Index. Now this.

Mutual fund. Which is tracking. Nifty 50.

If you. Frankly. Look at it.

You don't have to think much. Because it knows. Which stock to buy.

How much to buy. So. It doesn't need.

A very big team. It doesn't need. A lot of research.

It just needs. To track this index. And that is why.

The. Expense ratio. Is really.

Low. Because. Expenses.

Are not much. Same thing could happen. If you.

Nifty. Next 50. Which is.

51 to 100. Ranked. Company.

Their. Index. Or you.

Mid cap 100. Means. Top 100.

Middle sized. Companies. Of India.

That. Or you. Small cap 250.

Which is. Top 250. Companies.

Small sized. In India. That.

So. Any. Index mutual fund.

If you. Have. That.

Again. Would be. A better sign.

Third thing. As I said. AUM.

AUM. Yummy. Yum.

AUM. Assets. Under.

Management. Means. How much money.

Which is. Invested now. Or.

Managed. And that. Again.

Is slightly tricky. It will be very less. I don't know.

Which is the Nau Sikhiya fund. Is running in the name of Ankur Waregu. Or something like that.

It will be very big. Then it will be a challenge. Because.

If you have to deploy more. Then more. Will go to those companies.

And their valuation. Will increase. There are not so many companies.

To invest. Etc. So.

There needs to be a fine. Balance around that. I have usually seen.

AUM of 15 to 25 thousand crores. Is like a good. Reasonable.

Size. To invest in. With that.

Of course. Please. Balance out.

How good is the brand. Do you want to. Do you know.

Does he have a track record. He has been in this country. For many years or.

In the mutual funds industry. For many years. All should be.

Obvious things. And then of course. The fourth.

And the most important. Well. Just as important.

Is. Past. Performance.

Future performance. Can't predict. We will see a little bit.

In past performance. But. What is very important.

Is not past performance. As an absolute. It is past performance.

Relative to. Index. Or a comparable.

So if I say that there is a fund of Ankur Waregu and it is a rockstar fund and it has given a 15% annual return for the last 10 years. Very good, not bad at all. The money is doubling every 5 years.

But the sector or industry that I am tracking, if that sector or industry has grown by an average of 17%, then what did I gain? What did I lose? What did I earn? What am I selling? That is why it is very important that you compare that return with what is comparable. If you go to Groww or Coin by Zerodha which is their mutual fund app or any other brokerage or mutual fund player, they will give you these comparisons which is a very important thing to consider. Keeping all these things in mind, you have to shortlist your mutual fund.

Like I said, a very clean way and a passive way of building a corpus is a large-cap mutual fund, a mid-cap mutual fund, a small-cap mutual fund and at best a thematic or a flexi-cap mutual fund. And that should complete your 3-4 mutual fund portfolio. Keep investing in this and make it happen.

Two things before I go which often people get confused by. Number one, step-up SIP. What is step-up SIP? Step-up SIP means if you do a 10% step-up and suppose you have done your SIP for Rs.1000, if you increase it by 10% next year, it will be Rs.1100. If you increase it by 10% next year, it will increase by Rs.121, so it will be Rs.1,221. So on and so forth.

Now people don't understand how this step-up SIP happens. Here is the, not the right way, but the ideal way to do it. What people do now is, the platform they are buying from, it can be Groww, Zerodha or anyone else, these are all very technologically superior platforms, how they invest in people very well, what are the risks, they are trying to explain everything and do a really good job.

So they make an inbuilt step-up in it, 5%, 10%, whatever. But you have to recognize that at the system level, where these mutual funds are being executed, there is no natural concept of step-up. This is something that they have built so that they can execute it from a software engineering perspective.

That they will make a separate order, place it, because we cannot buy mutual funds in round numbers only, we can also buy mutual funds in decimals. So whatever value you want to buy a mutual fund, you can always buy it. So it is not that you can buy 1 unit or 5 units or 10 units, you can also buy 1.12473 units.

And that means you can buy a mutual fund of any value. So they have built this as a product feature. But the backend where these mutual funds are actually being executed, there is no concept of step-up.

Now what that means is that if for whatever reason, this platform gets shut down in the future, then the whole process of your step-up will be shaken. Maybe it won't get executed, maybe you will get information but you won't know what is happening, how is it happening, because there is no concept of step-up in the backend. So the right way, not the right, but the ideal way according to me is the following.

Suppose you have done an SIP of Rs.5000, next year you have to step-up by 10%, so increase it by Rs.500. You start a new SIP of Rs.500. Then next year, you have to do 10% at Rs.5500, means Rs.550, so you will start another SIP of Rs.5500. And so on and so forth. With this, every SIP will run properly, you will have full control, at any point you can stop any SIP, stop it, redeem it and so on. And you will not have to rely on a platform to execute this step-up.

Second thing, you can start any SIP anytime, you can pause it and you can stop it. Many people don't know this. When I say in Money Matters that you have to invest for 10-20 years, they get scared.

You have to invest for 10 years. No, no, you don't have to do it, you should do it. It is your wish.

The beauty about SIPs is that you are the owner of it. So at some point, suppose you want to take a 2-month break, because some big event has come or expenses have increased, whatever, pause it and start again after 2 months. Suppose you have invested for 3-5 years, now you have to buy a house, you have to buy a car, and you feel that good money has come, let's redeem this and take it.

Absolutely, stop it, redeem it. Even if you don't redeem it, suppose you feel that this mutual fund is done, let's take someone else. So whatever money is left in this, if it stays there, then it won't get wasted, it will keep increasing.

So if you have invested in a mutual fund for 2-3 years, and 3 lakh rupees are left in it, now if you leave the mutual fund as it is, after 10 years, those 3 lakhs won't be there, that 3 lakhs plus on an average 12%, if it is a Nifty 50 mutual fund, 12% will keep growing. So after 10 years, 3 lakhs plus 12% for 10 years, that amount of yours will be there. It is not that when you stop your own investing, then the amount also stops growing, no, the amount keeps increasing.

This is the beauty of compounding. And that is why it works. You are putting your additional money from SIP, but the money that you have already put, till the time you don't take it out, it will keep increasing.

This is what I want you all to experience. So in 2025, if you haven't started investing yet, then promise me that you will start investing after watching this blog. And if you have started investing, then with a new clarity, very cleanly, clearly adopt a passive investment approach and invest for the long term.

Note :- I am not a SEBI-registered investment advisor. This blog is for informational and educational purposes only.It should not be considered financial advice. Always consult a qualified financial advisor before making any investment decisions.