How to select right Mutual Fund- Checklist

Investors must analyze the options that are available and then choose the mutual fund scheme that is suitable to their risks, financial goals, and time frame.

A wrong decision could result in the loss of your hard-earned savings.

What are the right ways to choose the most appropriate mutual fund?

Some investors rely on current market trends or seek guidance from relatives and friends.

This isn’t the most suitable solution. Instead, look for a fund that will fit your needs.

Different mutual fund schemes may be better suited to different financial goals and investing time frames.

While investors can limit down the mutual fund categories that are appropriate for their needs, selecting a specific mutual fund within the category is also important.

Before you take any decision, you should ask yourself questions:

What is the purpose?

Set a financial goal for yourself. Investing and, as a result, tracking become easier when you have clear goals. It could be that you wish to go on a dream vacation, fund your child’s education, retire, or purchase the house you’ve always wanted.

Read : Investment Option for Child Future

Determine how much money you’ll need to reach your goal and start investing according to your goals.

How long you Invest?

Long-term retirement planning is important. Longer investment horizons mean you’re taking on greater risks.

If you’re looking for a shorter duration, like 3 to 5 years, your risk-taking capacity is lower.

Mutual Fund selection Criteria

There are several factors to consider when picking which mutual fund is the best option. –

The fund can be evaluated based on its prior performance and cost ratio, fund size, and fund manager’s knowledge, as well as return expectations and risk tolerance, investment time horizon, financial understanding, and other criteria.

Do some study before starting your investment journey to help you make an informed decision and better understand “what is important” in mutual funds.

Let’s look at some important aspects to consider when choosing an investment fund.

Know your Investment Goal

The first step in selecting the best mutual fund is to determine your objectives –

Because they can help you choose the best fund for your goals, consider the amount of time you would like to invest, your expected return, and other factors.

However, without a clear goal, one does not have to cut short their journey.

The goal of investing can also be included in the investment target. Here are several examples:

  • Retirement Planning
  • Child Higher Education
  • Vacation Planning
  • Home Purchase
  • Other Long Term goals

The appropriate mutual fund category-equity fund, Debt Fund, Balance Advantage Fund or a Hybrid Fund – is determined by the end goal.

Risk Assessment:

This refers to the investor’s risk tolerance, as well as their understanding of the risks associated with each mutual fund.

For example, equity-oriented mutual funds are riskier, and the portfolio may suffer ups and downs.

However, equity mutual fund’s returns are often higher than other funds, making them suitable for investors willing to follow the “high risk, high return” strategy.

Debt funds, hybrid funds, and balance funds, on the other hand, are less risky and more secure. Their returns, however, are smaller than those of stock mutual funds, making them an excellent choice for cautious and beginning investors.


All investors, particularly newbies, should think about tax issues. The taxation of equity mutual fund returns is determined by the holding period and the relevant tax rate.

For after-tax returns, mutual funds are usually efficient.

Fund House track record

When you buy mutual funds, you put your trust in the fund house to manage your money.

The decisions taken by fund houses and fund managers might have an impact on the performance of your investment as well as the achievement of your financial goals.

Before selecting the best scheme, it is necessary to confirm the name of the fund house, as well as its history of existence and track records across several schemes.

Consistency in fund performance

Check how a plan compares to other schemes based on the stated benchmarks before deciding on one.

In addition, as well as the returns that are generated by benchmark indexes must also be reported.

One can compare the fund’s performance to benchmark returns to assess the alpha produced by the fund. This is the amount of excess returns from the fund over benchmark returns.

Investors should be aware that historical returns are not an assurance of future returns.

It could help investors feel confident with the fund’s investment strategy based on the investment plan the fund employs.

Scheme size (AUM)

One of the important aspect is fund size.

“As fund size grows, performance suffers. As small-cap funds grow, their performance suffers proportionally more than that of large-cap funds. As fund family size grows, however, fund performance actually improves.”

Fund performance as of the current Fund Manager

Fund managers principally make investment decisions when it comes to active funds. It is logical for investors to evaluate the fund’s performance under the current manager.

If the fund manager has just been appointed to manage the Scheme, it is possible to want to look at the alpha produced by other schemes that were previously managed.

A risk assessment of the Scheme

How the funds have produced results comparable to the risk taken in the portfolio.

If similar returns were produced through two mutual fund schemes, the one with less risk should be chosen.

The risk profile for the Scheme could be determined by looking at the level of concentration in the portfolio, the sharp ratio, standard deviation and others.

Risk Appetite of the Investor

It is also essential for investors to match their risk tolerance with the appropriate funds.

For instance, the investor could have narrowed down a small-cap fund but may not like the short-term volatility.

In this scenario, the shortlisted scheme should be removed from consideration and alternatively, mutual fund options can be considered that match the investor’s risk profile.

With these parameters in consideration, investors need to make an informed choice on how they will follow their financial objectives.

Quantitative Aspects- Ratios

With 1,500 plus schemes within the mutual funds (MF) industry, and new ones being added every day, there are many choices for investors to pick from.

Here are four ratios to assist you in separating good ones.

Standard Deviation:

Standard deviation measures the extent to which the fund’s volatility has been. 

The standard deviation is the spread of returns from its return on average.

Find schemes that have a lower standard deviation if you’re cautious. However, if the fund’s manager isn’t conservative enough, this can cause over-diversification or lower performance.

The biggest drawback of the standard deviation lies in its failure to differentiate between bad and good volatility since it considers positive and negative returns based on the average return.

Sharp Ratio:

A Sharpe proportion of any fund helps you understand how the fund’s performance has been about the risk it has taken it.

The Sharpe ratio measures the additional returns that a fund has earned over a risk-free return from investments, such as a short-dated Government Treasury Bill for the investment’s risk.


If you want to know how risky your fund is compared to its benchmark index, take a look at your Beta ratio. If the fund’s beta ratio is greater than 1, it is riskier than the benchmark index.

If it’s only 1, your investment is as at risk as to the benchmark index. All passively managed funds, including exchange-traded and index funds, have a beta of 1.

If the beta falls lower than one, the fund is more stable than its benchmark index.

Portfolio Turnover Ratio:

The fund manager purchases and sells securities regularly when the fund is well-managed.

The frequency with which your fund manager rotates the portfolio is assessed through a formula known as the turnover ratio in your portfolio. Typically, it’s determined over one year.

A low turnover ratio indicates an investment manager usually uses a ‘buy and keep strategy.

A higher turnover means more expenses (brokerage taxes, brokerage, etc.) at the scheme level for mutual funds, ultimately paid by investors, thereby decreasing the return.

However, a high turnover rate isn’t necessarily alarming. It could be due to the tendency to take profits frequently from investment.


The most beneficial mutual fund plans are not identical for all investors. It may vary based on the various aspects.

The best way to pick the most suitable mutual fund plan for your investment is to consider your objectives, risk profile, and time frame.

Do not choose mutual funds solely on their performance in the past.

Take your risk profile and goals into consideration, and then make an inventory of mutual fund options suitable to your needs.

The performance of mutual funds is contingent on many factors, and another influences each element in one way or another.