Picking the best mutual fund: A guide & overview

Picking the best mutual funds

Mutual funds offer a safe and secure way to spread the risk of investments by investing in different asset classes like shares, bonds, etc. But when picking the best mutual fund to invest, most investors would need some handholding. Here’s a primer on the popular investment vehicle.

Understanding mutual funds and the factors to consider when picking the best one

What are mutual funds and how do they work?

Mutual funds (MFs) are excellent investment opportunities where asset management companies (AMCs) collect monies from several investors and buy a diversified portfolio of shares, bonds, and financial securities.

MF investors get units/shares in the fund representing their portfolio share. The value of these units/shares fluctuates based on the portfolio’s performance. There will be other charges like management fees, which add to the cost.

You can invest in MFs through online portals, banks, and brokers.

Different types of mutual funds

  1. Equity funds—Fund houses invest mainly in stocks to maximize capital appreciation.
  2. Debt funds—They invest monies mainly in fixed-income securities and provide a steady income.
  3. Hybrid funds—The portfolio is a mix of equity and debt funds.
  4. Index funds—These track a specific index, like the Nifty, to replicate that performance.
  5. Sector funds—The funds invest in specific sectors such as banking and infrastructure.
  6. International funds—-The funds give exposure to investors who wish to invest in global markets.
  7. Exchange-traded funds—These mutual funds trade on stock exchanges just like stocks.

Key factors to consider when picking the best mutual fund

  1.  Align the type of mutual fund with your investment objective.
  2. Choose a fund that suits your risk tolerance levels.
  3. Assess the fund’s performance over the past and compare it with benchmark indices.
  4. The lower the annual fee the AMC charges, the greater the return on your investment.
  5. Check if the portfolio’s mix of equities and debt aligns with your objectives and risk tolerance.
  6. The fund manager’s investment decisions make or break profits.
  7. Larger funds have more resources, but managing them is difficult. Choose a fund that is not too big or small.
  8. Check if the tenure of staying invested in the fund matches your plans.

Analyzing mutual fund performance

Past performance and historical returns

1. Choose the appropriate benchmark to compare the MF’s performance.
2. Compare the historical returns across different periods.
3. Check if it has consistently outperformed the benchmark.
4. Analyze the risk.
5. Seek expert opinion.

Risk and volatility measures

Financial advisors use mathematical functions like Standard Deviation, Beta, Sharpe Ratio, Sortino ratio, and Alpha to measure the risk and volatility of MFs.

Expense ratio and other fund fees

1. Expense ratio—-The percentage of the annual fee charged by AMCs vis-a-vis total assets is the expense ratio.
2. Transaction fees—-This is mostly a one-time fee. AMCs usually charge a fee ranging from ₹100 to ₹150 for investments of ₹10,000 and above. This fee also applies if you have SIPs running that amount to ₹10,000 and above.
3. Entry/Exit load—-Load is the commission you pay when you buy or sell a mutual fund. The payment made on purchase is the entry load, while what you pay on sale is the exit load.

Analyzing the fund manager and the fund house

The performance of the fund manager, the fund house, and their investment strategies and risk management techniques directly affect the returns.

Assessing mutual fund suitability

Aligning your investment goals and risk tolerance
1. Is your goal to create a corpus for retirement or unexpected emergencies?
2. Is the risk factor of the fund aligned with your tolerance levels?
3. Match investment goals and the mutual fund type.
4. Diversification and asset allocation. Diversification means spreading investment across different asset classes and sectors. This minimizes capital risk.

Asset allocation refers to the percentage value of the monies across the different asset classes.

Tax implications of mutual funds

Taxes on MF dividend—MF dividend is added to the investor’s income and taxed.

Tax on redemption—-For equity funds for less than a year, there is a short-term capital gain tax @ 15%. If the gains are less than ₹I,00,000 for periods exceeding one year,  tax is nil. For gains greater than ₹1,00,000, it is 10% without indexation benefit.

In the case of debt funds for less than three years, the gain is classified as short-term capital gains, added to the investor’s income, and taxed. If you hold these for over three years, there is a 20% tax with indexation.

Balanced and hybrid MFs holding more than 65% of the portfolio as equity will be considered and charged like equity funds.

Evaluating the fund’s investment strategy and holdings

Evaluate the MF’s investment strategy with the fund’s stated objectives, risk profile, and investment style.

Evaluate the holdings according to the quality of the investments, diversity, and the alignment with AMC’s investment strategy.

Monitoring and managing your mutual fund investment

Tracking the fund’s performance and rebalancing your portfolio

You can review the fund’s performance regularly using online tools to ensure that it meets investment goals.

Revisit your investment goals and rebalance your portfolio accordingly.

The role of financial advisors and research resources

Financial advisors provide investment advice according to your goals and financial position.

Research resources like market reports, online tools, and financial publications provide necessary information about MFs, which can help you make informed decisions.

The importance of reviewing and updating your investment plan

All investments require periodic reviews. Your financial goals, market conditions, MF performance, and regulations would change over time. Therefore, you should rebalance your portfolio.

The impact of market conditions on mutual fund investment

Inflation, interest rate change, gross domestic product (GDP) growth, government policies, and geopolitical factors can impact MF investments.

Mutual funds generally do well in bull markets attracting more inflows, while bear markets lead to a dip in portfolio values.


You must consider various factors while picking the best mutual fund to invest as different investors have varying objectives and time horizons. Weigh the pros and cons and do proper research before investing.


How can I select best mutual fund?

To choose the best mutual fund, consider factors like return expectations, risk tolerance, investment horizon, downside protection, return consistency, and fund manager expertise.

How do I know which MF is best?

To determine the best mutual fund, consider factors like investment objective, consistency in performance, fund manager expertise, downside protection, and expense ratio.

How do I find a good mutual fund to invest in?

To find a good mutual fund, consider your investment goals, risk tolerance, fund performance, fees, and the expertise of the fund manager.

How do I choose the best fund?

Consider factors like return expectations, risk tolerance, investment horizon, historical performance, fees, and fund manager expertise. Consult a financial advisor for personalized advice.

Disclaimer: Investing in mutual funds is subject to market risks. Please read all scheme-related documents carefully before investing. Potential returns from a mutual fund product are not guaranteed. Past performance is not indicative of future results. None of our articles are intended to and should be considered investment/financial advice from CoinSwitch.

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