My lessons from mutual fund investing

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Here is a list of lessons I have learnt from eight plus years of mutual fund investing and countless hours spent studying and making analytical tools for the blog.

Perhaps many of these may seem trivial to regular readers, but for the record here goes.

1 Past performance matters, but not as much: Before choosing a mutual fund, it is common sense to check how it has fared. However, that is no guarantee of future success.

2 Selecting the right mutual fund is not possible This is naturally related to the above. Many frighten investors that it is important to choose the right fund else returns may be poor. This is nonsense. Active management is essential.

3 Reviewing is more important than selection. Thanks to this realisation, today I can choose funds in under ten minutes. You can do it in under 30 minutes for start :). Whatever fund I hold, whatever its past performance, if I am not able to properly review its performance with personal benchmarks, the time spent in selection is of no use. Read more: How to review a mutual fund portfolio

4 Returns are not important I have now learnt to review mutual funds or any other instrument without worrying about returns. Considering only what the current corpus is worth keeps me calmer. Low expectations also helps. Read more: Review Your Financial Freedom Portfolio in Seven Easy Steps

5 SIP is not a strategy We keep a SIP running and hope everything will turn out all right in the end. As mentioned above, active management is necessary and this is possible without stopping SIPs. Read more: Simple Steps to De-risk Your Investment Portfolio

Remember SIP <> Discipline!

Just because we have set an alarm clock to ring each morning at 5 am, does not mean we have become disciplined. We still need to get up. Starting a SIP means little. We need to learn how to systematically reduce the risk associated with a SIP

6 Go beyond SIPs Although I am a fan of systematic investing, I found a SIP too stifling. Discipline is not a problem for me and it takes under a minute to make an investment online. And I am not that busy that I cannot spend a few minutes to invest manually. This does not tie me down to a single fund. Not recommending this, just a lesson for me.

7 Star ratings are useless They are flawed in multiple ways -trying to rank an inhomogeneous group, assuming returns fall on a bell curve etc.

The key issue is that the start rating analyst looks at fund performance at a different period that than that you have invested in. This can make a world of difference. It is like the Blind Men and the Mutual Fund!

Read more: 

Here is why you should ignore mutual fund star ratings

Part II: Here is why you should ignore mutual fund star ratings

8 Peer comparison is useless after we start investing in a mutual fund Even if we compare category peers for the exact investment dates as ours, it is not productive. Due to several requests, I making a tool that enables such a comparison but …

I prefer a simple check to see if the fund is outperforming the total returns index of its chosen benchmark. This can be done either with:
Multi-index Mutual Fund Rolling Returns Calculator or

Mutual Fund SIP Rolling Returns Calculator or

Mutual Fund SIP XIRR Tracker

9 I have better things to do than to time the market Forget the fact that there is no evidence that timing the market will work. Even if we assume that timing fans will get more returns, I don’t care. I have better things to do.  

10 Do not hesitate in choosing new funds Just because a fund is an NFO or has not much history to speak of, does not mean it should be shunned. I am happy to buy funds from AMCs who I trust and fund managers with proven record. Not because new funds can perform better.  Just a nice clean start. As mentioned above, reviewing performance is more important.

11 Stay away from popular funds Investors exhibit a lot of herding tendencies and flock to a fund that others are investing in. When this happens, the AUM swells up in a short time and the fund is unlikely to remain a “top performer” for very long.

Instead, I prefer consistent performers with 3-star ratings and not so high AUM that many people are not aware of. I am happy to be an inconspicuous investor.

12 Keep it simple and minimalist You live and learn. For the first few years, my purchases were not focussed. If I had to start over, I will build a minimalist portfolio with just 1/2 funds per portfolio per goal (yes, I prefer to have separate funds for separate goals).

13 Expenses are important, but so is alpha I have never bothered to look at the expense ratio of a mutual fund. The shift from regular to direct immediately upon introduction helped me save considerably. Other than that I am happy with my alpha, for which I need to pay. Perhaps this will change in future and indexing will be better. Happy to shift when I see evidence that an actively managed portfolio of active mutual funds cannot beat the index.

14 There is no right or wrong. Only grey! There is no right or wrong. No optimal way to do things because it appeals to common sense. Volatile instruments provide returns which are highly irregular. When it rains, it pours and when it is dry, it is draining. 

We have to choose a method and have the conviction to stick to it, and/or have the ability to analyse alternative methods and evaluate if it would be suitable.

15 Patience is key I love sideways markets. It is a great time to accumulate units without noise about how overvalued the market is. When the markets eventually move up (they many not!), the seeds sown will bear fruit rapidly. Here is an example.


Notice the how the investments made during the sideways market after 2008 zoomed up around Aug 2013. Read more about my Mutual Fund Investing Journey.

Or see the Animation: Gain or loss in my retirement portfolio (June 2008 to May 2017)

16 The past is prologue. There are valuable lessons to be learnt from the past. And all of them revolve around how much returns can fluctuate.

These are my lessons. I am not a one-trick pony to claim that my experience is the best way to do things. Therefore, this should not be construed as investment advice. Only as one of the many possible ways  to go from point A to B.

Over to you. Happy to learn your key investing lessons.


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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. Sir, Kindly ignore my innocence in asking this question if this is silly..

    from your above post //* Happy to shift when I see evidence that an actively managed portfolio of active mutual funds cannot beat the index.*//

    Does investing in Mutual Funds through FundsIndia Portal is called as “regular investing” and not “direct investing” ? If so, doing “regular investing” thro’ FundsIndia portal will not beat the index?

    If my understanding is incorrect, Please correct me.

    Thanks for your time.

    Guru Prasad Pandurengan.

    1. No that is not what I meant. This is not about regular or direct. This is about active funds vs passive funds.
      While investing in passive funds, you dont have to worry about outperformance or underperformance as one should in active funds. There is an argument that blindly investing in the same active fund may not beat a passive fund. So I am saying, if I actively manage (weed out underperformers) my active fund portfolio, I may be able to beat a passive fund.

  2. sir,
    Good article. My philosophy is we should benchmark our mutual fund portfolio with s&p 500 index to check the portfolio performance. If we are not out performing it, it is better to invest in S&P 500 ETF.
    It won’t make sense when we are underperforming it.

  3. Sabaash! Terrific effort as usual Professor.
    My own journey in the last 3 years have taught me many things, some of which are echoed here. Much as we read blogs and learn, there is nothing like taking the plunge and experiencing equity MF investing on our own. And luck and timing are the Key! Prayer helps too.

  4. Keep it simple and minimalist – You live and learn !!

    That was a clincher 🙂

    IMO and experience, keeping this single philosophy first, really takes care of lot of things ‘automatically’.

  5. If sip are such pariah and then follow 16 sermons on mf investment one will b better of doing direct equity investment and use these “guidelines”. Y pay even such high direct expense ratio.

  6. I like that point about investing in a smaller funds, some of Kotak’s funds are small, given very impressive returns and charged lower expenses.
    Regarding SIPs, its better to run it for about 50-60% of our investment target for each month while the other part can be invested on our own depending upon market falls. This will ensure consistent investment throughout the year especially for a bull run period from March this year.

  7. Dear Pattu Sir

    I have a basic question. Assume I have an SIP of a period of 3 years of which 1 year is completed and the 2nd year is running. Until today, the SIP has accumulated a total of 2000 units (ie. 1500 units comprising from the 1st year and 500 units from the 2nd year that is current year). Suppose If I stop the SIP today and redeem today 1000 units.

    1. Will the short term capital gain tax be deducted at the redemption by the MF company, as it is considered as less than 1 year or

    2. Should I need to remit the tax at the time of filing the return or

    3. Short Term Capital Gain Tax is not applicable as the 1000 units belong to the 1st Year which is already more than a year. (ie. First In First Out for Redemption logic).

    Please clarify.

  8. Hello Mr. Arun,

    In SIP, each accumulated equity MF fund unit has to complete one year to become tax free under current laws.

    1 ) No

    2) Needs to be done, if excess tax is payable.

    3) Yes, On redemption, it will be first in first out logic.

    You can check AMC website, to get idea about short/log term capital gains taxes..Or sites like valueresearch(dot)com

  9. Sir, once u have identified a bad fund what do you can u pls elaborate on it ( say I have 10L or more on a fund accumulated over the years) , (I am in tax bracket of 30%) I gues LTCG of 10% applies immaterial of which tax bracket my total income is in

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