Does India’s DIY mutual fund boom needs structured assistance?

Over 5-6 crore Indians now invest in mutual funds, marking a milestone in the way the country is saving and creating wealth. Powered by frictionless digital platforms, Do-It-Yourself (DIY) investing has democratised access to capital markets, with investors coming from more than 99 per cent of India’s PIN codes. Getting started with investments has never been easier. However, while opening an account takes mere minutes on a smartphone, building a portfolio that can survive market cycles is an entirely different story.

Convenience has solved the access problem, but it has also pushed lakhs of first-time investors into complex decision-making around asset allocation and selecting the right mutual funds. As this market matures, the next phase of digital investing is expected to rely on curated advice and structural assistance. “Even on digital platforms, advice and assistance is going to be crucial over the next five to ten years to ensure that investor experience remains good,” said Nilesh D Naik, Head of Mutual Funds, PhonePe. He was in conversation with Abhishek Singh, Associate Editor, LiveMint in the most recent episode of Mint’s podcast Why Not Mint Money.

Staying away from performance biases

A common mistake made by DIY investors is chasing recent market outperformers. Human psychology tends to seek shortcuts when faced with complex decisions. In behavioural terms, this “cognitive conservation” leads people to rely on any easily visible metric to make their investment choices, which is returns of the fund in the past 3-5 years. This data, however, may not always take into consideration the cyclical nature of financial markets.

“If you look at the correlation between the previous five years and the next five years for let’s say a large cap index like Nifty 100, in the last 20 years it has been negative 0.4. This means that if you see phenomenal returns for the last 5 years, there are very high chances that for the next 5 years your returns will be average or less than that,” said Naik.

Evaluating a scheme requires looking beyond superficial return charts to analyse downside protection, rolling return consistency and risk metrics.

Understanding process over price

While Net Asset Value (NAV) reflects past outcomes, it reveals little about the underlying mechanism driving those numbers. Evaluating actively managed funds requires an understanding of how the portfolio is built, the stability and experience of the investment team and bias of the fund manager, if any.

Even within broad categories like flexi-cap funds, managers operate with distinct investment styles. Investors must see whether the core strategy and team dynamics remain intact across changing market cycles. Frameworks like PhonePe’s CRISP (consistency, risk and investment style of portfolio) can help bring structured evaluation to active fund selection. In contrast, passive funds generally offer greater predictability, as their mandate and structural style are explicitly defined by the underlying index.

Balancing long-term equity exposure with downside reality

Investors in the 25–30 age bracket can take higher exposure to equities as they have longer time horizons. The investment sizes are also smaller, offering scope for experimentation. However, allocating entire portfolios to equity without assessing emotional risk tolerance can lead to premature exits during market downturns.

This is because equity as an asset class is inherently volatile, having historically experienced drawdowns of 40-60 per cent during major market corrections such as those in 2000, 2008, and 2020. While broader market indices typically recover within 2-3 years, concentrated exposure to sector or thematic funds carries significantly higher risk. Today, thematic and sectoral funds represent the largest equity category by folio count, exceeding 3.25 crore folios.

“If you are concentrated into certain themes or sectors, the risks are much more and they become real because they last for a very long period,” Naik explained.

Fixed income and debt alternatives

Retail participation in mutual funds remains heavily skewed toward equities. Less than 5 per cent of non-institutional retail investors invest into debt or arbitrage funds. Viewing mutual funds purely through an equity lens leaves portfolios vulnerable to unnecessary volatility.

Low-risk avenues like liquid, arbitrage and fixed-income funds serve as vital shock absorbers during market corrections. Beyond capital preservation, holding non-equity allocations provides liquidity to rebalance into equities when market valuations become attractive. Expanding investor awareness around non-equity strategies remains essential for well-rounded portfolio construction.

Overcoming behavioural barriers

The biggest hurdle for most investors is managing their own behavioural impulses. During market peaks, lump-sum equity inflows surge significantly, only to taper off during subsequent market corrections. Leaving critical timing and allocation decisions to individual discretion can lead to buying high and selling low.

Mechanisms that automate investing help remove emotional bias. Systematic Investment Plans (SIPs) have grown from modest monthly flows to significant industry volumes precisely because they enforce disciplined allocation. Newer variations, such as daily SIPs tailored for self-employed individuals with daily cash flows, further widen access while removing timing friction.

Looking forward, solutions like lifecycle funds offer similar structural benefits. By automatically adjusting asset allocation based on an investor’s age and goals, these frameworks reduce the impulse to chase short-term returns. Managing wealth effectively is less about reacting to yesterday’s headlines and more about establishing frameworks that protect investors from their own emotional tendencies.