Which Mutual Fund to Pick for Beginners: The 'Only 3 Funds' Portfolio

The "Paradox of Choice" Trap

You finally decided to start investing. You opened a demat account. You have ₹10,000 ready to SIP every month.

You log into your app and search "Mutual Funds". You are instantly hit with a wall of 2,500+ options.

HDFC Small Cap. ICICI Technology Fund. SBI Bluechip. Axis ESG. Quant Active. Regular vs Direct. Growth vs IDCW. Active vs Passive.

It feels like you need a PhD in finance just to click the "Buy" button. So, what do most beginners do? They panic. They do one of three things:

1. •The Paralysis: They get overwhelmed, log out, and leave the money in a 3% savings account forever.
2. •The Finfluencer Trap: They buy whatever sketchy "Sectoral Fund" a YouTuber is currently screaming about.
3. •The "Diworsification": They buy 10 different funds, thinking "more funds = more safety."

All three are terrible mistakes.

The Mutual Fund industry is complex by design. They create thousands of complex products with fancy names because complex products justify high fees.

But wealth creation is actually incredibly boring. You do not need a complex portfolio to get rich. You only need three funds.

Welcome to the "Only 3 Funds" Portfolio. This is the ultimate minimalist, low-cost, high-efficiency system to build wealth over the next 20 years. Let’s break it down from first principles.

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Part 1: Why You Keep Losing (The Active Fund Illusion)

Before we look at the 3 funds you should buy, we need to understand why you should never buy the other 2,497 funds.

Almost all the heavily-marketed funds on your app are Active Funds. This means a highly-paid Fund Manager sitting in an AC office in Mumbai is manually picking stocks, trying to "beat the market".

Because this manager is expensive, the fund charges you a high fee called the Expense Ratio (usually around 1% to 1.5% per year).

Do they actually beat the market? Every six months, S&P Global releases a report called the SPIVA Scorecard. It tracks whether these expensive human managers actually beat a dumb, automated index.

The data is brutal. Over a 5-year and 10-year period, 80% to 90% of Active Large-Cap Fund Managers fail to beat the index.

Think about that. You are paying them 1% of your wealth every year, and 8 out of 10 times, they perform worse than a computer program that charges 0.1%.

When you buy an Active Fund, you take on Manager Risk. What if the manager quits? What if they make a bad bet? What if the fund size gets too big to manage?

The solution is to eliminate the manager entirely.

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Part 2: The Core — The Nifty 50 Index Fund

This is the bedrock of your portfolio. Everything else is built on top of this.

What is it?

The Nifty 50 is a list of the 50 largest, most dominant companies in India. Reliance, HDFC Bank, TCS, Infosys, ITC, L&T, Bharti Airtel.

A Nifty 50 Index Fund is basically a robot that blindly buys these 50 companies in the exact proportion of their size. No human intervention. No guessing.

Why is it the ultimate beginner fund?

1. •Survival of the Fittest: The Nifty 50 is self-cleansing. If a company does poorly (like Yes Bank or Reliance Communications), it gets kicked out of the top 50. A new, growing company immediately takes its place. The index always holds the winners. You never have to manually sell the losers.
2. •Zero Manager Risk: There is no human making mistakes. It just copies the market.
3. •Ultra-Low Cost: Because commas and algorithms do the work, the Expense Ratio is practically zero (around 0.1% to 0.2%).
4. •Proof of Pudding: The Nifty 50 has returned roughly 12% to 14% CAGR over the last 20 years.

How much should I allocate?

50% to 60% of your total SIP amount should go here. This is your stable, slow-compounding engine. It will not double your money in a year. But it will relentlessly churn out wealth decade after decade.

Which specific one to buy?

It literally doesn't matter, as long as it has the words "Nifty 50 Index Fund - Direct Plan - Growth". Look for the one with the lowest Expense Ratio and Tracking Error. (Examples: UTI Nifty 50 Index Fund, HDFC Nifty 50 Index Fund, Navi Nifty 50).

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Part 3: The Booster — The Nifty Next 50 Index Fund

The Nifty 50 gives you stability. But the top 50 companies are already massive elephants. They grow steadily, but they rarely explode in value overnight.

If you want a little more aggressiveness without entering the wild west of Small Caps, you need the Next 50.

What is it?

The Nifty Next 50 index holds the companies ranked from #51 to #100 in India. These are the "soon-to-be giants". The mid-to-large cap crossover companies.

Companies like Trent, Bharat Electronics, Zomato (recently promoted), TVS Motor, and HAL spent years in the Next 50 before graduating to the top 50.

Why do you need it?

1. •The Incubator: The Next 50 acts as the training ground for the Nifty 50. You are buying tomorrow's mega-caps today, when they still have room for aggressive growth.
2. •Higher Returns (with higher volatility): Historically, the Next 50 has often outperformed the Nifty 50 over long periods, though it crashes harder during market corrections.
3. •Perfect Diversification: By owning the Nifty 50 AND the Nifty Next 50, you effectively own the Top 100 Companies in India. You own 80% of India's entire stock market capitalization.

How much should I allocate?

30% to 40% of your total SIP amount.

Why not Small Caps or Mid Caps?

Because they are highly volatile and require immense psychological discipline to hold during a 50% crash. Beginners usually panic and sell at the bottom. The Top 100 companies give you 95% of the upside of the Indian growth story with a fraction of the heartbreak.

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Part 4: The Anchor — The Liquid Fund

You have your Nifty 50 building the core. You have your Next 50 adding the boost. Why do we need a 3rd fund?

Because the stock market crashes. And life emergencies happen exactly when the market is down.

If you lose your job during a recession, the last thing you want to do is sell your Nifty 50 SIPs at a 40% loss just to pay rent. You need an Emergency Fund.

What is a Liquid Fund?

It is a Debt Mutual Fund. It does NOT invest in the stock market. It lends money to the government and AAA-rated mega-corporations for extremely short periods (up to 91 days).

Why do you need it?

1. •Safety: It is the safest type of mutual fund. It rarely, if ever, sees negative returns for more than a few days.
2. •Better than a Savings Account: Your savings account gives you 3%. A liquid fund historically returns 6% to 7% — almost keeping pace with inflation.
3. •Instant Liquidity: Many liquid funds allow you to instantly withdraw up to ₹50,000 to your bank account within 30 minutes, 24/7/365.

How much should I allocate?

You don't SIP into this indefinitely. You build this up until it reaches 6 Months of Living Expenses. Once the bucket is full, you stop putting money here and direct 100% of your SIPs into the two index funds.

(Note: If you already have a robust EPF/VPF setup or massive FDs, you might not strictly need a Liquid Fund. But it is the perfect parking spot for emergency cash).

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Part 5: The "Diworsification" Trap (Why you shouldn't add more)

"Okay, I bought the 3 funds. But my friend has a Tech Sectoral Fund, a Small Cap Fund, and a Flexi-Cap. Should I add them?"

NO.

Here is what happens when retail investors buy 10 different mutual funds: Portfolio Overlap.

Let's say you buy a "Bluechip Fund", a "Large & Mid Cap Fund", and a "Flexi-Cap Fund". If you look inside those three funds, all three of them hold HDFC Bank, Reliance, and TCS as their top holdings.

You haven't bought three different strategies. You have just bought HDFC Bank three times, and paid three different fund managers a 1% fee to do the exact same thing!

By owning just the Nifty 50 and Nifty Next 50, you already own every single major company in India that matters. Adding a Flexi-Cap or a Large-Cap fund on top just dilutes your returns and creates overlap.

"But what about Thematic/Sectoral funds like AI or Infrastructure?" Thematic funds are cyclical. By the time a theme becomes a "New Fund Offer (NFO)" and gets marketed to you, the smart money has already made their profits and exited. Do not chase themes. Buy the whole market.

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Part 6: Setting it up (The Execution Phase)

Here is your exact action plan for Monday morning.

Step 1: Choose the App Download a "Direct" mutual fund platform. Zerodha Coin, Groww, INDmoney, or Kuvera. (CRITICAL: Never use your bank's app like single-click HDFC Securities or ICICI Direct if they are selling you "Regular" plans. Regular plans pay a 1% secret commission to the bank broker every year. Only buy "DIRECT" plans).

Step 2: Start the SIPs Let's assume you want to invest ₹20,000 every month. Here is your portfolio:

• •₹10,000 (50%) -> UTI Nifty 50 Index Fund (Direct - Growth)
• •₹6,000 (30%) -> DSP Nifty Next 50 Index Fund (Direct - Growth)
• •₹4,000 (20%) -> Aditya Birla Sun Life Liquid Fund (Direct - Growth) (Until you hit 6x monthly expenses, then redirect this ₹4K to the equity funds).

Step 3: The "Set and Forget" Routine (The Hard Part) The hard part isn't buying the funds. The hard part is doing absolutely nothing for the next 10 years.

You will log into Twitter and see someone flexing a 200% return on a penny stock. You will see news headlines screaming "RECESSION IMMINENT". You will see your uncle buying a new ULIP from LIC.

You must ignore all of it. Your job is to automate the SIP, delete the app from your home screen, and focus on increasing your primary salary.

The Verdict

The finance industry thrives on making you feel stupid. They want you to believe that investing requires 10 screens, complex charts, and obscure funds with fancy French manager names.

It is a lie.

The greatest investors in the world, including Warren Buffett, recommend the exact same strategy for 99% of normal people: Buy a low-cost Index Fund and go back to work.

The "Only 3 Funds" Portfolio is boring. It will not give you anything cool to talk about at a cocktail party.

But 20 years from now, when the overlapping active funds have bled out their investors via fees, your boring 3-fund portfolio will have quietly compounded into a war chest of millions.

Keep it simple. Buy the market. Let compounding do the heavy lifting.