Factors Affecting Mutual Fund Investment Decisions

Investment decisions in mutual funds are influenced by factors including market performance, fund objectives, risk tolerance, fees, time horizon, and the fund manager's experience and investor preferences.
Factors That Affect Mutual Fund Investment Decisions
3 min

Investors should consider several key factors before making their mutual funds investment decisions. These include assessing their risk tolerance, defining their investment objectives, understanding their time horizon, and evaluating the expertise and track record of the fund manager.

Investing in mutual funds can be beneficial in many ways. You get the advantage of instant portfolio diversification. Depending on the fund you choose, you may also benefit from expert fund management and tax benefits. However, the process of choosing a mutual fund can be quite intimidating for most investors. If you too find it daunting to select a suitable scheme for your portfolio, this article on the factors affecting mutual fund choices can help you.

Here, we take a look at the main factors affecting the selection of mutual funds and discuss an example for more clarity.

Factors to keep in mind while making mutual fund investment decisions?

Different categories of mutual funds have varying features and characteristics. These aspects need to align with your investment strategy and outlook. So, to ensure that you make a sound choice, here are some important factors affecting the choice of mutual funds.

Investment goals and risk tolerance

Your choice of mutual funds should align with your investment goals. For instance, if you want to earn a regular income, a debt fund that offers a fixed income may be suitable. However, if you want the opportunity to create wealth, market-linked equity funds may be better choices for your portfolio.

Your risk tolerance and risk capacity also affect the type of fund you should choose. This is, in turn, affected by your age, your financial stability, the nature of your income and your existing debts. If you can afford to take on more risk, equity funds may be ideal. However, for more conservative investors, balanced or debt funds may be better.

Past performance and fund manager’s track record

Past performance is not an indicator or a guarantee of any future returns. However, it can help you understand how a mutual fund scheme has performed across different market cycles and during different economic or geopolitical developments. You can also get a better idea of how the fund performed in volatile markets.

The fund manager’s expertise is another crucial factor affecting mutual fund performance. If you want to invest in actively managed funds, you must always check the fund manager’s experience, track record and history of fund management. This will help you choose a fund that is handled by an experienced professional.

Fund categories and strategy

There are different categories of mutual funds, like equity, debt, hybrid and more. Within each category, you have different sub-categories as well. To ensure that you make an informed choice, it is important to account for these factors affecting mutual fund selection among investors.

The category of the fund influences its investment strategy, which is another crucial factor to account for. Ultimately, the strategy adopted by the fund should be beneficial to your overall investment goals, so you can increase the potential to earn your required returns without compromising on your risk-taking capacity.

Economic conditions and market sentiment

These two factors also significantly affect mutual fund performance. During periods of economic growth, equity funds may perform well because top companies may report higher earnings and sustained profits. Conversely, in the case of economic downturns, debt funds may offer a safer avenue to invest your money as they provide stabler returns than market-linked investments. You also need to consider the positive investor sentiment during bullish phases and the negative sentiment during bearish phases.

Investment costs

The expense ratio of a mutual fund is also important. It gives you a better idea of the fees charged by the fund house. A higher expense ratio can be detrimental to your overall mutual fund returns. So, it is best to try and shortlist funds that have lower expense ratios. This way, you can maximise your returns as much as possible.

Investment horizon

Another important factor affecting the choice of mutual funds is the investment period or horizon. Close-ended funds have a defined investment tenure, while open-ended funds can be redeemed at any time. However, some assets like equity may offer better returns over the long term. You need to account for all these aspects too.

Tax implications

Mutual funds are also taxed differently based on the type of investments they include. Some, like Equity Linked Savings Schemes (ELSS), even offer tax benefits on the amount invested up to Rs. 1.5 lakhs. Before you choose a mutual fund, you must be clear about how the capital gains and dividends from the scheme, if any, will be taxed.

Professional advice

Professional advice can be invaluable when you are choosing mutual funds for your portfolio. Financial advisors assess your investment goals, current financial situation, risk tolerance and other aspects to recommend suitable mutual fund schemes. Their expertise and experience can help you avoid common investment mistakes and ensure that your fund choices align with your long-term financial objectives.

Example of considering different factors affecting mutual fund selection

Say you are an investor with the following profile and financial scenario:

  • Age: 40 years
  • Investment goal: To build retirement savings in the next 20 years
  • Risk tolerance: Moderate
  • Investment budget: Rs. 25,000 per month

In this case, considering your age, goals, investment horizon, risk tolerance and investment budget, you can choose balanced funds or large-cap equity funds for your portfolio. To further compare and shortlist suitable mutual fund schemes, you must also look into the expense ratio, the experience of the fund manager, the fund’s track record and other factors affecting mutual fund choices explained earlier.


The bottom line is that before you invest in any mutual fund, you need to factor in the aspects outlined above. This way, you can ensure that the fund aligns with your overall investment strategy. Once you have considered all the factors affecting the selection of mutual funds, you can shortlist some schemes and compare mutual funds to find the perfect fit for your portfolio.

The Bajaj Finserv Mutual Funds Platform makes mutual fund investments easier for you, with over 1,000 mutual fund schemes to choose from. You can even decide to make a lumpsum or a SIP investment — whichever works best for you.

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator

SIP Calculator

Lumpsum Calculator

Step Up SIP Calculator

Mutual Fund Calculator

Brokerage Calculator

FD calculator

Frequently asked questions

What factors affect my mutual fund investment choice?
Some of the key factors affecting mutual fund investment choices include your financial goals, risk preferences, the type of fund and your investment horizon.
What factors should I consider before investing in a mutual fund?
Before you invest in a mutual fund, you must look into different aspects like why you are investing, the period by which you want to earn returns and how much risk you can take on.
What are the risks associated with mutual funds?
Depending on the type of mutual fund you want to invest in, you may have to deal with different types of risks like market risk, concentration risk, credit risk and liquidity risk.
Why should I choose mutual funds for my portfolio?
Different types of mutual funds give you different benefits like diversification, tax benefits, expert fund management, market-linked returns and more. These are all good reasons to choose mutual funds for your portfolio.
What factors affect the NAV of mutual funds?
The primary factors affecting mutual funds NAV include the market condition, market volatility, investor sentiment and demand and supply forces.
Show More Show Less

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on No Cost EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more


Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.