9 Things I Wish I’d Known Before I Tried How to Select Best Mutual Fund?

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I receive a lot of inquiries regarding how to select best mutual funds.

Mutual funds are a great way to invest your money and build wealth over the long term. They are different from shares.

While there are thousands of mutual funds out there on the market, how do you determine which one is the best for you?

Don’t worry; in this post, I will cover some of the things you should look at before investing in a mutual fund to maximize returns.

A mutual fund is an investment that pools money from various investors. A professional investment manager decides how to invest the money and makes sure it grows. 

Mutual funds are good investment options for people who do not have enough time or knowledge about investing.

When it comes to investing money in a scheme, investors often choose their next scheme based on the successful past performance of other similar schemes or friends’ advice. 

However, returns can be misleading as past performance may not guarantee future results. 

It is always advisable to do some research rather than following blindly what others say. Mutual funds are designed to give the best return on investment. 

Choosing a mutual fund is not difficult, but it can be time-consuming.

Many people are intimidated by the process of finding the perfect mutual fund for their needs, but with proper research, they can find one that is appropriate for their situation.

An investor should begin searching for the perfect mutual fund by identifying goals, time frames, and risk tolerance.

Main Factors for Selecting a Mutual Fund Category

how to Select Best Mutual Fund

Consider these 3 factors for Selecting a Mutual Fund Category :

  1. Investment objective
  2. Time frame
  3. Risk tolerance

1. Investment objective:  

How to Select Best Mutual Fund

The first question an investor should ask is the purpose of investing the money.

What do you want to use this investment for?

Are you saving for a new home or a college education?

Are you ready to retire and need a safe investment that will yield dividends?

These are all valid reasons, but deciding on an objective helps narrow down the options of mutual funds to invest in. As much as possible, set a goal that is realistic and achievable.

2. TimeFrame: 

After determining the objective, the next step is establishing a time frame for this investment. This will help select an appropriate investment vehicle (e.g., short term, long term, etc.).

time frame

Are you investing for the short term (less than 3 years) or long term (more than 10 years)?

Short-term investing is riskier because it opens more opportunities for loss, but on the flip side, it comes with higher rewards. It’s important to note that mutual funds that focus on short-term investments typically yield higher returns because they invest in riskier assets.

While long-term investing is less risky and generally yields lower returns, your money should reach its full potential after a longer period.

3. Risk Tolerance: 

how to Select Best Mutual Fund

Investors also need to assess their risk tolerance when deciding on their mutual fund. Some mutual funds can be extremely risky, and it is important to know this before investing money.

Investors who are not comfortable taking such a high risk should avoid these types of investments.

Sometimes, even the most conservative investor will invest in an aggressive fund if they feel confident about the market and their ability to monitor the investment closely.

After an investor has determined their individual goals, time frame for this investment, and risk tolerance, they can begin to explore the different available funds.

Top Factors for Choosing Best Mutual Fund

Investing in a mutual fund is like buying into a business; its shares represent ownership in that business.

mutual fund
Best investment, money working for you or mutual fund return, savings or wealth management, searching for yield concept, businessman investor walking savings piggybank hunting for dollar money return.

Investors should explore the available options and find one that seems appropriate for their needs.

Here I consider 9 parameters that must be considered while selecting a good mutual fund:

1. Rolling Returns:

Rolling returns are the measure of return on investment realized by an investor based on how many gains or losses are made within a given period. 

Rolling Returns takes the data of mutual funds and calculates its return for each day, month, or year. The longer the time frame for rolling returns, the more accurate it becomes.

While last year’s return may look attractive but if consistent high returns in the past do not back it, then do not select that fund.

Rolling returns are best used to compare two funds with similar objectives, but not against funds having different objectives. 

2. Diversification: 

Diversification is one of the most important criteria, which should always be kept in mind while investing in any mutual funds.

The more diversified a fund is, the higher will be its performance and returns. 

Hence choose such funds that consist of various asset categories like equity, debt, gold, etc.

3. Fund Manager Record:  

One of the most important factors when choosing a mutual fund is how well the money is managed. Find out if the manager has an impressive track record and experience in his field.

Check whether the mutual fund manager has delivered good returns over a reference period, say 5 years.

4. AMC Track Record:   

Check the previous track record of an Asset management company by looking at its fund performance over a longer time horizon. 

For example, if the AMC has 5 funds, then check the performance of all funds over a longer time. Only purchase if they have a consistent track record of producing good risk-adjusted returns.

5. Fund History :

Check the performance of the mutual fund over the long term, i.e., 6 to 8 years. This will give you an idea of how the fund performed over Good and bad times. A good track record of, say, 5 years is an indicator that it can generate higher returns in the future also.

6. Low Expense Ratio:

The expense ratio is the percentage of your investment that pays for administrative costs and the “management fee” charged by the mutual fund manager. 

To lower your expenses, don’t forget to take the expense ratio into account. Look at funds with a low expense ratio. Expense ratios vary from range 0.5% to 2%.

7. Portfolio Turnover Ratio:    

The portfolio turnover ratio tells you how much of the fund’s portfolio was changed in a year.  

Suppose the Portfolio turnover ratio increases, which means that the fund is buying and selling its securities more frequently. This is a sign that the fund manager is not very confident about its performance.

The higher the Portfolio turnover Ratio, the more transactions happen in a year, and hence fewer returns are delivered by the mutual funds due to costs incurred in trading. 

So avoid a fund that has a high ratio of portfolio turnover.

8. Fees/Loads:  

Mutual funds charge loads/fees for their services, and these charges are usually transparently shown in the fund profile. Some charges are charged by every MF scheme, while some charges are specific to a particular scheme of that Fund house. 

There are two types of loads:

A. Front end load: The fee charged by a mutual fund to purchase investment units in the fund.

B. Back end load: The fee paid by an investor who redeems or sells his interest in a mutual fund before a specified number of years since the investment.

So always select the mutual funds with no load charges and no exit load charges.

9. Performance Against Benchmark :

Mutual funds are generally benchmarked against a market index, several market indices, or even an investment portfolio.

A mutual fund scheme should ideally deliver returns higher than this benchmark to be considered better.

Also, when assessing a mutual fund, look at the fund’s performance in bull and bear markets. If a scheme has been able to deliver good returns in both periods, you should consider it an investment option.

FAQs About How To Select Best Mutual Fund:

mutual fund faqs

(Q1) Which Website or App to use for researching Mutual Funds?

You can use any Website or App that you want! Google finance, money control, and ETMONEY are a few good examples.

(Q2) What are Exit load fees?

Exit load fees are fees charged when you sell your mutual fund units before the fund’s lock-in period is over.

Exit load fees are payable to the mutual fund or brokerage, which sold you the units. The bigger the number of units you have in a mutual fund, the more money you are likely to lose as exit load fees.

This fee can be 1%-1.5% of your redemption amount.

Some good mutual funds don’t charge exit load fees, while some bad ones may even be as high as 5%.

(Q3) What is the difference between large-cap, mid-cap, and small-cap mutual funds?

The size of a company determines where it falls in the capital structure. Large caps are companies that have a market capitalization of more than $10 billion.

Mid-caps are larger than small-caps but smaller than large caps, and their market capitalization is between $2 billion and $10 billion.

Small caps have a market cap of less than $2 billion.

Large caps are considered safer investments because they have a wider economic moat around them, which means it is tougher for new entrants to compete with them.

Mid-cap and small-cap companies are considered to be riskier because they have less of an economic moat.

(Q4) Who is a mutual fund agent? What kind of commissions does he earn?

A mutual fund agent works for a brokerage firm and helps sell mutual funds on commission. He gets paid around 3.5-7% of the amount invested by you in the scheme.

(Q5) What is an expense ratio? How will it affect me?

The fund’s total expenses are divided into two components: the management fee and the operating expenses. The management fee constitutes 80-90% of the expense ratio while operating expenses are 10-20%.

(Q6) What is a ‘net asset value’ (NAV)? How do I calculate it?

The NAV of a mutual fund scheme is the total worth of all its units. It can be calculated by taking the total value of the scheme’s assets and subtracting its liabilities.

The NAV is calculated at the end of every trading day.

(Q7) What is the difference between direct and regular plans?

A direct fund does not have a distributor, and one has to invest directly with the AMC or its designated bank if they plan on investing via a SIP.

This ensures that you get the best deal without any commissions involved.

Regular plans are where people invest through a broker, who works on a commission basis for the fund house/AMC.

It’s not always that direct plans will give better returns than regular ones. However, they do have lower expenses since there is no brokerage involved in investing in them.

This means you save on commissions every year when you invest in a direct plan.

(Q8) What is a ‘SIP’? How does it save me money?

A SIP stands for Systematic Investment Plan and lets you invest in small amounts at regular intervals (usually monthly or quarterly), rather than having to make a lump sum contribution every month.

SIPs, on the other hand, have lower expense ratios and can save you money in the long run.

(Q9) What is ‘minimum investment’? Should I always invest the minimum possible amount?

You need to invest at least Rs.500 per month to start a SIP account for mutual funds.


The 9 parameters that I’ve discussed in this blog post can be a good starting point for you to start selecting a mutual fund. 

However, many other factors might need consideration before making your final decision.

After all, an investment is not just about the returns but also about how much risk you’re willing to take on and what time frame you have? 

If you have any questions or comments, please leave them in the comment section below!

Disclaimer: The above information is provided only for educational purposes and is not intended to serve as specific financial advice.  Before selecting or investing in mutual funds, do consult your financial advisor.
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