What is it that 23 year olds do not know about investing in Mutual Funds? 

{As answered on Quora - by me out of the hat of course}

If the stock market goes down a Mutual fund has no responsibility to exit the market to save you from any potential loss. 
In short MFs are not market timing investments.

So what is the greatest strength of a Mutual Fund that you can rely on?

MFs are headed by Portfolio and Fund Managers that hire the services of Research analysts inside and outside the fund to help identify the best investments based on the investment objectives. So a blue chip fund will try to find you the best Blue chip stocks. A sector fund will buy stocks from that sector and get you the maximum Beta from that sector. A hybrid fund will use some models to shift from debt to equity and vice versa. And a midcap fund will buy you potential high growth stocks.

MFs will therefore get you the best investments inside the said scheme based on the best Research and insights of the Fund Manager and then attempt to hold them as long as you want to stay invested with them.

What do MFs not do? And they won’t tell you this in clear words as I do.

MFs will never exit the market or stocks till they are convinced that they are no more investment worthy. If they exit something they will replace it with something else. They are not allowed to hold a lot of cash legally. In other words market timing is not their job. So If the Steel sector cycle turns down and if all the steel stocks are going to go down as per published research a Steel sector fund cannot get out of the Steel sector. No that is not their job.

Whose job is the timing part?

The job of timing is completely and always that of the investor himself. Unless he buys into the argument “Market timing is subject to risk”

Now let me also add long term bull markets can last from 20–30 years at a stretch and if you are investing at the start of those cycles you do not want to be market timing. Also sector themes last for 5–10 years in which they give you the best performance. Take infosys from 1994–2000. 100 times plus. Won't happen again.

In short at the end of sector cycles or long term bull markets it is essential for long term investors to take heed and change their allocation to other asset classes like debt or gold or currencies. However this decision has to be made by the investor. Also if you star investing in a sector fund because of the popularity of a sector for the last 5 years or more be aware that you maybe late in the trend and an exit is important.

Learning to exit was considered one of the most important skills in investing when I was born. But at the end of bull markets it is abhorred. Long term investors who have made money in this time will also talk you out of it. MF distributors will tell you not to bother as it is no ones cup of tea.

All of his is nonsense.

However one innovative solution around this problem has been SIP. If you are scared of the market and do not know how to time it use an SIP. and SIP is a great way to enter a market that has been going on for a while. However anyone tell you that SIP is a great way to exit a market too? You cannot time the bottom and you cannot time the top. If exit is important why not USE an SEP = Systematic Exit plan? Yes you should!!

One of the oldest simple books on the subject I read was “It;s when you sell that counts” by Donald Cassidy, and no it is not about short selling or anything. It is about investing and how to identify when it is time to exit. You can build some simple thought models for yourself based on simple ideas like what are people taking about. Or are you boasting about your investments? etc. Reading behaviour and market euphoria through a check list is useful.

MFs are a great way to invest Lumpsum as well if you are well researched and want to make asset allocation calls. To shift from blue chip to midcap or from sector to sector from equity to debt. Using websites like value research you can identify the best funds for each purpose and then allocate based on your view. But you have to have a view to do this. Either yourself or by subscribing to a good source of such information.

Investing in stock markets involves education, either about timing or chosing themes assets and sectors. MFs are a great way then to use this education without having to do the homework or individual stocks. Yes leave that to the experts. ETFs and MFs are designed to help investors do this.

Around the world the above practices are widespread. In India people are still learning the basics. But Most AMCs and their distributors miss sell their product when they tell you not to have any knowledge about timing or sector/asset allocation. Reason? They have no idea about it, it is not their expertise and well they are forbidden by Law to do so. Yes MFs cannot sell everything by Law.

Now I hope you have a better mind on how to go about MF investing.

If you are 23 years old, an SIP + Education is a great way to start. As you get more educated you can make better allocations as your total savings in MFs goes up. At the start the amount will be nothing that affects your long term well being. But after 5–10 years the corpus will need your attention. So do not forget to start educating yourself on the above subjects.

Enjoy Investing!