How to Choose Mutual Funds

Mutual fund selection is based on several parameters. These include return expectation, risk tolerance, and investment horizon. Read the blog to explore more.
How to choose Mutual Funds
4 mins read
10 Apr 2024

Mutual funds are like treasure chests for investors, offering a diverse range of investment opportunities managed by professionals. But with thousands of options, finding the right one feels like searching for a needle in a haystack.

Fear not, we are here to simplify the process and help you find the perfect mutual fund that fits your financial dreams. From understanding key features to the performance metrics, we will guide you through every step. Get ready to unlock the secrets of selecting the ideal mutual fund to make your money work smarter and grow your wealth effortlessly. Let us explore how to choose mutual funds, factors affecting mutual fund selection and many more in detail.

How to choose mutual funds for investment in 2024?

Selecting a mutual fund is a 2-step process – selection of the mutual fund category and selection of a scheme in that category. Here are the factors which an investor should consider while selecting a mutual fund scheme:

Factors to consider before selecting mutual fund category

Investment objective

Firstly, it is imperative to define your investment objectives clearly. Whether your aim is to purchase a property, finance your child's education, prepare for retirement, or indulge in a dream vacation, discerning your financial goals provides the compass for selecting the most suitable mutual fund. Various categories cater to diverse goals; for instance, equity funds prove advantageous for long-term aspirations exceeding five years, owing to their potential for higher returns. Conversely, debt funds are conducive to shorter horizons ranging from one day to five years, offering comparatively lower risk. Hybrid or balanced funds amalgamate equity and debt components, presenting a middle ground with moderate risk.

Time horizon

Assessing the timeframe for your investment tenure is crucial. Different fund categories exhibit varying performance dynamics over distinct time frames. Liquid funds are apt for addressing very short-term financial needs spanning one day to three months, while ultra short-duration funds cater to periods of three months to one year. Short-duration funds accommodate investment horizons ranging from one to three years, whereas hybrid or balanced funds are conducive to durations spanning three to five years. Equity funds, known for their potential to yield significant returns, are recommended for investment periods exceeding five years.

Risk tolerance

Understanding and evaluating your risk tolerance is paramount. The Securities and Exchange Board of India (SEBI) categorises funds into five levels based on risk, ranging from low to high. Aligning your risk tolerance with the appropriate fund category ensures that your investment strategy remains congruent with your comfort level. By considering these essential factors with care and diligence, investors can navigate the landscape of mutual fund categories with clarity and confidence, laying a robust foundation for their investment journey.

Factors to evaluate before choosing mutual funds


The first step is to identify your financial goals and the time horizon for achieving them. Different mutual funds have different objectives, such as capital appreciation, income generation, tax saving, etc. You should choose a mutual fund that matches your goal and risk profile. For example, if you want to save for your retirement, you can opt for a balanced or hybrid fund that invests in both equity and debt instruments. If you want to save tax, you can invest in an equity-linked savings scheme (ELSS) that offers tax benefits under Section 80C of the Income Tax Act.


The second factor is to assess your risk appetite and tolerance. Mutual funds are subject to market fluctuations and can have varying degrees of risk, depending on the type and composition of the underlying assets. Generally, equity funds are riskier than debt funds, while small-cap funds are more risky than large-cap funds. You should choose a mutual fund that suits your risk profile and does not expose you to undue stress. For example, if you are a conservative investor, you can invest in a liquid or ultra-short-term fund that offers low risk returns. If you are an aggressive investor, you can invest in a sectoral or thematic fund that focuses on a specific industry or theme and offers high returns with high risk.


The third factor is to consider the liquidity of the mutual fund. Liquidity refers to the ease and speed with which you can buy or sell units of a mutual fund. Different mutual funds have different liquidity features, such as lock-in period, exit load, redemption limit, etc. You should choose a mutual fund that offers you the flexibility to withdraw your money when you need it. For example, if you want to invest for a short term, you can choose an open-ended fund that allows you to redeem your units at any time without any penalty. If you want to invest for a long term, you can choose a close-ended fund that has a fixed maturity period and offers a higher return potential. It is crucial to note that access to closed-ended schemes is limited, allowing investments only during the New Fund Offer (NFO) period.

Investment strategy

The fourth factor is to understand the investment strategy of the mutual fund. Investment strategy refers to the approach and philosophy adopted by the fund manager to select and manage the portfolio of the mutual fund. Different mutual funds have different investment strategies, such as growth, dividend, index, etc. You should choose a mutual fund that aligns with your investment style and preference.

Fund performance

The fifth factor is to evaluate the performance of the mutual fund. Performance refers to the returns and risks generated by the mutual fund over a period. You should compare the performance of the mutual fund with its benchmark and peer group, and consider the consistency and stability of the returns. You should choose a mutual fund that has delivered superior and consistent returns over the long term, and has outperformed its benchmark and category average. However, you should also remember that past performance is not a guarantee of future results, and you should review the performance of the mutual fund periodically.

Expense ratio

The sixth factor is to check the expense ratio of the mutual fund. Expense ratio is the annual fee charged by the mutual fund for managing your money. It includes various costs, such as management fee, distribution fee, etc. Expense ratio reduces the net return of the mutual fund, and hence, you should choose a mutual fund that has a low expense ratio. However, you should also consider the quality and value of the services provided by the mutual fund, and not compromise on the performance and suitability of the mutual fund for a lower fee.

Exit load

The seventh factor is to look at the exit load of the mutual fund. Exit load is the fee charged by the mutual fund when you sell units of the mutual fund. Exit load reduce the net return of the mutual fund, and hence, you should choose a mutual fund that has no or minimal exit load. However, you should also consider the liquidity and lock-in period of the mutual fund, and not invest in a mutual fund that has a high exit load and a long lock-in period.


The eighth factor is to consider the tax implications of the mutual fund. Taxes are levied on the income and capital gains earned from the mutual fund, depending on the type and duration of the mutual fund. Generally, equity funds are taxed at 15% for short-term capital gains (less than one year) and 10% for long-term capital gains (more than one year), with a threshold of Rs. 1 lakh. Debt funds are taxed at the marginal tax rate for short-term capital gains and 20% with indexation for long-term capital gains. You should choose a mutual fund that offers you the best post-tax return, and take advantage of the tax benefits available for certain mutual funds, such as ELSS.

Direct plans

The ninth factor is to opt for direct plans of the mutual fund. Direct plans are the plans that allow you to invest in the mutual fund directly without any intermediary, such as a broker, agent, or distributor. Direct plans have a lower expense ratio than regular plans, as they do not include any commission or distribution fee. Direct plans offer you a higher return potential, as the savings in the expense ratio are added to your returns. You can invest in direct plans through the online platforms of the mutual fund houses or through third-party portals.

Types of mutual funds

Mutual funds are investment vehicles that pool money from various investors and invest it in different assets such as stocks, bonds, money market instruments, etc. Depending on the asset class, investment objective, risk profile and structure, there are various types of mutual funds in India. Some of the common types are:

  • Equity funds: These funds invest mainly in stocks of different companies. They aim to generate capital appreciation over the long term. They are suitable for investors who have a high risk appetite and a long investment horizon. Equity funds can be further classified into large-cap, mid-cap, small-cap, multi-cap, sectoral, thematic, index, etc.
  • Debt funds: These funds invest primarily in fixed-income securities such as bonds, treasury bills, corporate debentures, etc. They aim to provide regular income and capital preservation. They are suitable for investors who have a low to moderate risk appetite and a short to medium investment horizon. Debt funds can be further classified into liquid, overnight, ultra-short, short-term, medium-term, long-term, dynamic, gilt, credit risk, etc.
  • Hybrid funds: These funds invest in a mix of equity and debt securities. They aim to provide a balance of growth and income. They are suitable for investors who have a moderate risk appetite and a medium to long investment horizon. Hybrid funds can be further classified into aggressive, balanced, conservative, dynamic, arbitrage, equity savings, etc.

Apart from these, there are also some other types of mutual funds such as solution-oriented funds, which cater to specific goals like retirement, children’s education, etc., and fund of funds, which invest in other mutual funds.

Various investment costs to know in mutual funds

Understanding various investment costs in mutual funds:

  1. Understand the Expense Ratio
    The expense ratio is the fee paid by the investor to the fund house.
  2. Learn about one-time charges
    Also known as transaction charges, these are paid during the initial investment.
  3. Know about entry load
    When purchasing mutual fund units, investors pay a nominal charge called entry load, although not all funds charge this.
  4. Be aware of exit load
    Exit load is charged on mutual fund unit redemption, typically ranging from 0.25% to 4%. No charges are applied after the lock-in period.
  5. Understand load
    This is the commission paid to intermediaries or Asset Management Companies (AMCs) before or after investment. Redemption charges are sometimes applied as well.
  6. Account fee
    This fee is levied for maintaining an account.
  7. Management fee
    Paid to the fund manager for expert fund management services.
  8. Recurring fee
    Charged for marketing, advising, portfolio maintenance, etc.
  9. Switch price
    Levied if the investor switches from one mutual fund to another.
  10. Distribution and service fee
    Charged for AMC emails, marketing, etc.

Things to consider before investing in multicap funds

  1. Investment objectives: It is crucial to define your investment objectives clearly. To maximise returns from these funds, it is advisable to have an investment horizon of at least 5 years.
  2. Risk: Investing in multicap funds entails exposure to stock market risks. Short to medium-term market fluctuations can be unpredictable, so investors must be comfortable with the inherent volatility associated with stock investments.
  3. Expense ratio: Understanding the expenses impacting your returns is essential. Asset management companies charge an expense ratio to manage the multi-cap fund you are considering. This fee covers administrative and operational expenses, including the fund manager's compensation, and is typically charged annually.

Key take aways

These are some of the factors and information that can help you choose the best mutual fund for your investment needs. However, you should also do your own research and analysis, and consult a financial advisor if needed, before investing in any mutual fund.

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Frequently asked questions

How do I choose a mutual fund to invest in?

To choose a mutual fund, define your investment objectives (e.g., retirement, education, wealth creation), choose a fund category (equity, debt, hybrid) based on your risk appetite, and evaluate historical returns, expense ratios, and fund managers.

Which is the safest mutual fund?

Debt funds are generally considered safer due to lower volatility. Liquid funds offer extremely low risk, suitable for short-term parking of funds.

Which is the best mutual fund for beginners?
  • Index funds: Simple, low-cost, and track market indices.
  • Balanced funds: Blend of equity and debt, suitable for beginners.
Which mutual funds give the highest return?
  • Equity funds: Historically offer higher returns but come with higher risk.
  • Small-cap and mid-cap funds: Potential for substantial growth.
What is the success rate of mutual funds?

Success varies based on market conditions, fund selection, and investor behaviour. Diversification and long-term investment enhance chances of success.

What fees do mutual funds charge?
  • Expense Ratio: Annual fee for managing the fund.
  • Exit Load: Charged on premature redemption.
  • Transaction Charges: Applicable for buying/selling.
When to buy mutual funds?

Buy mutual funds when you have a clear investment goal, funds available for investment, and a favourable market condition, ideally during periods of low market volatility or after thorough research.

What is the most important factor?

There is no single most important factor. It depends on your goals and risk tolerance. Consider your investment horizon, risk appetite, and financial goals (retirement, child's education, etc.) when choosing a fund.

What affects performance?

Market conditions, fund management style, and the underlying investments (stocks, bonds) all influence a fund's performance. Research the fund's historical returns and investment strategy.

What risks are involved?

Market risk (overall market fluctuations) and credit risk (risk of issuer default) are key concerns. Some funds may be more volatile than others.

Who cannot invest?

There are generally no restrictions based on age or occupation. However, minors typically need a guardian to invest on their behalf.

Best age to invest?

The earlier you start, the more time your investment has to grow. However, any age is suitable as long as you invest for a long-term goal and choose a fund aligned with your risk tolerance.

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