How to start Investing

Lurking in reddit, one of the most common questions I find is how to start investing.

Some come with randomly picked mutual funds and others directly ask it.

Unfortunately,  there is no structured way to teach it and I too started the same way -  simply  picking random funds, understanding things and then improving.

Now that I have obsessed over the topic for nearly a decade, I think I am qualified to give an advice -  or atleast attempt to.

However before I get into the actual process, I highly recommend doing the following two things : 

1. Adequate Emergency Fund
2. Adequate Medical Cover

The reason I call this mandatory is because Equity is lumpy. It can go on for years without any returns whatsoever. Please refer to the below chart of nifty 500.

As you can see from the chart, the market spends a long time doing nothing or at a loss. This is to be expected.

For multiple years, the market does nothing, and then it in one shot, it will reward your patience before testing your patience again.

If you don't have the cash flow, It is only natural that you will sell what you are building at a loss -  which is exactly why it is absolutely mandatory to build them before investing.

There is ample information on how to build those, and so I will skip it -  but I do hope you take the prequisite seriously -  without you you are planning to fail.

“By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb."_Warren Buffet

The reason I quoted Warren Buffet above is so that we should take his wisdom when building our portfolio.

We should start with a simple index fund - nothing too fancy.

You might want to look up what Nifty 50, Nifty Next50, Nifty 100, Nifty 200, Nifty Midcap 150, and Nifty Small cap 250 are.

Essentially, investing in these are what Warren Buffet recommended.

Now, you might feel like hitting me on the head for building up so much just to recommend index investing - but hear me out.

I am not an index investor myself, and we will come to it, but it is simply brilliant to start with these.

What most people dont realize is that index fund at it's core is a momentum fund.

Every investor, who invests in it, automatically invests in the largest companies the most, making the prices go up faster.

If you look at data, You will see that index funds generally tend to beat the active management. Please refer to the below data from value research :

Particular	Large-cap funds (%)	Mid-cap funds (%)	Small-cap funds (%)
Outperformance	60.9	27.3	97.6
0-2% outperformance	60.9	27.1	15.4
2-4% outperformance	0.0	0.2	35.9
4-6% outperformance	0.0	0.0	33.0
>6% outperformance	0.0	0.0	13.2

Data considered from January 2018 to February 2026. The benchmarks considered are Nifty 100 TRI, Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI. Average fund of each category considered.

As you can see from the data, over large periods of time,  Even when active large-cap managers manage to win, they only beat the index by a maximum of 2%—a rounding error that barely justifies their higher fees.

For mid-caps, it's even worse. With only 27.3% outperforming, it means the passive index absolutely crushed nearly 75% of highly paid active managers.

But when it comes to small caps, active management  actually can outperform the index - however small caps has the risk of liquidity and excess volatility and therefore I wouldnt recommend the same.

And so, as an absolute beginner, the only logical thing to do is simply stick to the index fund and you will likely do better than someone who chose a wrong active manager.

You can either choose a single fund like : Nifty 500, or Nifty 200 

or

You can use multiple like: Nifty 200, Nifty midcap 150 and Nifty small cap 250.

This forms the blank canvas that you build your portfolio in.

Even though I call it blank, this blank canvas is all you will ever need to perform investing.

Once you have it in place,  depending on how you react to the different market conditions you can add or remove either  more small cap, mid cap, large cap.

You are literally done with a maximum of four funds.

But be slow and intentional on the change as this phase is one of the most important phase for your folio -  this is where you discover your asset allocation and risk tolerance.

You can spend years on this, to identify how much allocation you need to each market cap - And I recommend years, because it will take almost five years to see a full market cycle (market going up and then down).

It is only when you see the market go down, can you really judge your comfort level - If you attempt to judge the allocation when the market rises,  no matter what allocation you have, chances are that you will feel good -  untill you see it crash.

Once you are confident on the Market cap allocation, if you would like, we can move on to the Active Funds - But this is compeltely optional -  Quite literally you dont have to do anymore. 

But if you still insist on active funds, the first thing to answer is why?

What exactly are you expecting the fund manager to do that the index is not doing? Why is that you want to pay them fees?

To answer this, you need to define your investment thesis. 

Broadly, active managers follow specific philosophies to pick stocks. 

Ask yourself what makes sense to you:

• Value: Are you looking to pick cheap but fundamentally good businesses that the market is currently ignoring?
• Growth: Do you want to buy the businesses that are in the news, showing massive momentum and future earnings potential?
• GARP (Growth At a Reasonable Price): Do you want growth, but refuse to pay absurdly high prices for it?
• Quality: Is your priority ensuring the balance sheets are pristine and the businesses have a high return on capital?
• Dividend: Do you strictly want to buy dividend-yielding stocks for regular cash flow?

There are many more styles of investing, but I recommend sticking to these, since these are what the indices would have taught you.

This forms your investment thesis—your core investment philosophy.

You can choose one or a mix of multiple, but here is the golden rule: you do not let go of the asset allocation you discovered in the initial step.

Whatever active fund you choose, the portfolio's Large, Mid, and Small-cap weights should approximately match the comfort level you spent years figuring out.

Similar to how we started with the broad market index as a base, you can do the same here - You can use a multi-cap or a flexi-cap fund as your core, and then add specific mid, small, or large-cap funds around it to fit your personal asset allocation.

Or you can even add some of these to simply complement your index fund, but that will create a conflict at a philosophical level - but there is inherently nothing wrong with doing it.

With AI, getting a list of cap and the associated philosophy should become extremely simple - but confirm the thesis by reading the reports yourself.

And so with this step, you will have a marriage between your philosophy, allocation and risk-appetite.

Honestly, if you do this much itself, you will do great (IMO).

But if you want to check the other stuff, go ahead. 

Research the manager and check their experience. Check the rolling returns of the fund you pick. Look at the AUM,volatility, Alpha, Beta, Standard Deviation, Downside Capture Ratio, and Upside Capture Ratio and compare it to it's peers.

These metrics will tell you everything about the history of the fund and give you a solid feel for what you are buying into. 

But remember—historical metrics just explain the past. It does not guarantee that the manager will keep doing the exact same thing in the future.

But please also note : 

While I am not against having too many funds, it is important that you only bite what you can chew -  do not choose too many funds.  

While choosing too many funds may not impact performance, it becomes incredibly difficult to track. If you portfolio underperforms, it would become hard for anyone to tell you why it underperformed and your only move would be to purge it.

And the final waring - do not change the manager you hired over a whim or fear -  as long as he does what he was hired to do, there is no need to replace him -  even if he underperforms.

The only reason to change would if  your chosen asset allocations goes off since, he is no longer following what he did when you purchased, or if he has drifted off the philosophy you had chosen him for.

Never replace him for underperformance, as philosophies themselves work in a cycle -  Vaue might underperform and growth might overperform today, but value might be the next winner  few years down the line.

If you do swap, ensure you swap within the philosophy you chose - or understand why you are changing your philosophy, so that you dont keep switching it.