Why Most Indians Choose the Wrong Mutual Fund — And How to Fix It

prachied
Nov 29
2 min read

Updated: Dec 11

India’s mutual fund industry has grown fast, but the investing mindset hasn’t. Most investors aren’t selecting funds correctly — they’re reacting to noise, marketing, and short-term performance. The result: wrong fund choices, early exits, and below-potential returns.

This isn’t a lack of opportunity. It’s a lack of clarity.

1.Chasing Past Returns

Most investors pick funds by looking at last year’s top performer. That’s irrational.

Morningstar data shows that in many equity categories, funds delivering 12% CAGR over five years saw actual investor returns closer to 9%, a loss of 3% every year — purely due to buying after rallies and exiting after corrections (Morningstar, 2025).

Thematic funds are worse. In one example, a sector fund delivering 23% annualised returns still saw investor returns significantly lower because most investors joined after the theme peaked (Morningstar, 2025).

Point: past returns tell you where the fund has been — not whether it fits your profile.

2. Ignoring Risk Categories

A mid-cap fund isn’t a flexicap fund. A flexicap fund isn’t a large-cap replacement.

Different categories exist because risk and volatility differ.

Suggested horizon by category:

Category	Suggested Minimum Horizon	Volatility
Large Cap	3–5 years	Moderate
Flexicap	5+ years	Moderate-High
Midcap	7+ years	High
Smallcap	8–10+ years	Very High

Investors want mid-cap returns, but expect large-cap stability. Reality doesn’t work like that.

3. Over-Diversification: Too Many Funds

Holding five funds is diversification. Holding nine is confusion.

Portfolio overlap studies show that when investors hold 8+ equity funds, the portfolio may end up sharing 80–90% of holdings with Nifty50 / Midcap100, while still paying multiple expense ratios.

This means: more funds ≠ better investing. It often becomes index replication with extra fees.

4. Ignoring Investment Style (Value vs Growth vs Contra)

Many investors buy funds without understanding strategy.

Value funds hold beaten-down stocks and may underperform for long cycles.
Growth funds buy expensive stocks and can fall sharply in downturns.
Contra funds deliberately bet against market sentiment — they look “wrong” until they suddenly look brilliant.

The issue isn’t the fund. It’s the mismatch between expectations and behaviour.

5. No Goal, No Horizon, Zero Discipline

The biggest reason investors fail isn’t performance — it’s inconsistency.

AMFI data shows that the SIP stoppage ratio hit 74.5% in August 2025, meaning nearly 3 out of 4 investors stop SIPs within a short period instead of allowing compounding to work.

And yet, wealth creation is possible. According to historical SIP return analysis, many diversified equity funds have delivered 15–20% annualised returns over 15–20 years (Advisorkhoj study).

Compounding requires time, not excitement.

6. Misunderstanding “Average Returns”

Returns shown in fact sheets are time-weighted, not investor-weighted. They assume someone stayed invested from point A to point B — without panic exits.

A recent analysis highlighted that relying only on mean returns hides volatility, leading investors to overestimate stability (Economic Times, 2025).

This leads to unrealistic expectations → premature exits → regret.