Last Updated on December 29, 2021 at 12:12 pm
I received two interesting questions received on email. (1) As a new investor, how many mutual funds do I need to begin with? (2) Can I begin investing with a single multi-cap fund? Interestingly, the answer to the second question is “yes” and that is the also the answer to the first question – “one”.
Yes, most investors, whether old or new need just one equity mutual fund (the fixed income allocation is essential and separate, we shall not consider this here). If I could go back in time and correct one mistake, it would be buy a fewer number of funds. So you could either learn from my mistake or disregard this hindsight gyan and reinvent the wheel.
This post is part of MF FAQ a series in which we answer basic newbie questions. As a sample check out: MF FAQ: 20 Basic Questions on mutual funds answered – part one and part 2
What is a multi-cap mutual fund?
The “official definition” is : An open ended equity scheme investing across large cap, mid cap, small cap stocks (min 65%). This differs from a large and mid-cap fund where individual allocations are defined: min 35% in large caps and min 35% in mid caps.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
However as the AUM of a fund increases, a multi-cap fund tends to become a large and mid-cap fund. So from a practical point of view, there is not much difference between multi-cap and large and mid-cap.
Why only one (diversified) equity mutual fund?
Why not? A single fund typically offers a basket of 40-60 stocks across sectors (although typically finance heavy) and decent spread across market cap. What else does one need? I am not trying to say a two fund portfolio like one large cap and one mid cap is right or wrong. Just pointing out that one fund can get the job done.
How? What are the advantages?
Imagin you hold a two fund portfolio (which is pretty rare!): 60% of large cap and 40% of mid caps. After a couple of years, the mid-cap stocks have either moved up or down significantly. What would you do?
(A) Nothing (B) shift from mid-caps to large caps to book profit or vice versa to buy low. Option B would lower risk, make you sleep better and with luck might even fetch better returns. Most investors, whether they hold 2 funds or 10 or unlikely to re-balance within an asset class (or re-balance period) fearing exit loads and taxes – penny wise pound foolish approach.
If instead of 2 funds (or 20), the investor held a single multi-cap or large and mid-cap fund, the fund manager would do such re-balancing with no additional cost to the investor. Not only does the investor get a minimalist portfolio trivial to track, she also gets active market cap risk management.
Surely, there are disadvantages?
First, that is a statement not a question, but I get it. Second yes there are always disadvantages. The investor can keep worrying if they have picked the “right” fund and get all worked up. The truth is they do that even with 20 or rather 1/2 become 20 because of that attitude. So there is not much one can do about this.
I would say there are mental issues (like with most things concerning money) than actual portfolio issues. The investor must:
- have conviction to pick a fund and stick to it
- know how to review a fund performance without emotions
- have conviction and courage to shift mutual funds completely. That is if the fund held does not work after a 3Y* period, switch completely to another fund (both future and past investments).
* Remember that this is an equity fund and you are investing for a long-term goal (10Y + away)
Most people cannot pull this off even if they get paid advice. However, if you think that you can pull it off, then I am fairly confident it will work well.
Wait. Will I not get averaging benefit with many funds?
No, you won’t. Rather, you would average something somewhere but is that a benefit or not is impossible to judge or back-test. So it is merely psychological.
Hang on, you said one aggressive hybrid fund is enough or one balanced advantage fund is enough. Now you are saying one multi-cap fund is enough? This is so annoying and confusing
The problem is to expect and look for the “best solution” to an answer. You can build a one-fund equity portfolio in many ways, a two-fund equity portfolio in many ways. Multiple solutions is how nature operates. Get with the programme!
I have had enough of you, just tell me the fund names
Likewise. Glad you said names because there are so many of them:
- Parag Parikh Long Term Equity Fund Review
- Mirae Asset India Equity Fund (this is 2015 review) Mutual Fund Review: Mirae Asset India Opportunities Fund
- ICICI Multi-cap seem okay too at a quick glance
- There is Franklin Prima Plus
- Canara Robeco Emerging Equity is also decent
- ICICI Value Discovery
- Quantum Long Term Equity and others in the Value oriented category
But how to choose one from this?
I thought you have had enough off me? You have the following options (yeah there is a choice everywhere)
- Use My Handpicked Mutual Funds January 2019 (PlumbLine)
- use my monthly mutual screener (which explains how to choose)
- ask unknown people in a personal finance group
- search for best mutual funds and you will see your fav bloggers post on “top 10 best 15 mutual funds” If that is one too many for you, ask them what to choose.
However you pick, unless you know how to review and when to exit, there is no point. The essential point of this post is that is it is important to have a plan before buying mutual funds.
Check out the latest from freefincal on YouTube
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)