Keep it simple: Why retail investors should not mimic professional fund managers

The piece exemplified a curious phenomenon that has emerged in the investment world over the past decade. Individual investors with day jobs, families, and lives to live have begun adopting the analytical frameworks and portfolio construction methods of professional fund managers.

This trend reached its peak during the recent bull market when retail investors began discussing concepts like "factor investing", "style boxes", and "correlation matrices" with the same earnestness once reserved for professionals managing thousands of crores.

But here's the thing: most of this complexity is not just unnecessary for retail investors — it's actively counterproductive. Consider the fundamental differences between these two worlds. Professional fund managers are paid full-time salaries to study markets, analyse companies, and construct portfolios. They have teams of analysts, access to management teams, and sophisticated risk management systems. Most importantly, they're managing money for thousands of investors who expect consistent performance and detailed explanations for every decision.

The retail investor, meanwhile, has perhaps an hour or two each week to dedicate to investment decisions. They manage their own money with clear, long-term goals like retirement or their children's education. They don't need to justify their choices to anyone but themselves, and they don't face the career risk that comes with underperforming benchmarks.

Yet somehow, the retail investor has been convinced that they need to think like the professional. They feel compelled to have opinions on whether Indian banks are overvalued relative to their global peers, or whether the current economic cycle favours value stocks over growth stocks. They worry about having the "right" sector allocation and stress over whether their portfolio is sufficiently diversified across market capitalisations.

This complexity creep serves no one except the financial services industry, which profits from selling more products to confused investors. The mutual fund industry, in particular, has thrived by creating an ever-expanding universe of specialised schemes that cater to every conceivable investment thesis. Want exposure to small-cap consumption themes? There's a fund for that. Concerned about ESG factors in your technology holdings? Another fund awaits.

Keep it simple

The irony is that while retail investors are making their investment process increasingly complex, the actual solution to their needs has become simpler than ever. A combination of two or three well-chosen mutual funds can provide all the diversification and professional management that most investors require. An equity fund, a debt fund, and perhaps an international fund can cover the vast majority of investment objectives for the average Indian household.

For those seeking even greater simplicity, a single broad-based index fund offers instant diversification across hundreds of companies, automatic rebalancing, and the lowest possible costs. The Nifty 50 index fund doesn't require you to have opinions about sector rotation or management quality—it simply gives you a proportionate stake in India's largest companies, which is exactly what most long-term investors need.

This isn't to suggest that all complexity is bad or that everyone should invest identically. Rather, it's a recognition that the level of analytical sophistication should match the investor's circumstances, time availability, and actual needs. An officegoer saving for retirement doesn't need the same investment process as someone managing a fund.

The most successful retail investors I've encountered over the years share a common trait: they keep their investment process boring. They choose a few good funds, invest regularly regardless of market conditions, and largely ignore the endless stream of market commentary and product launches. They understand that their edge lies not in superior analysis but in superior behaviour — the ability to stay invested through market cycles without getting distracted by complexity.

Dhirendra Kumar is founder and chief executive officer of Value Research, an independent investment advisory firm