How To Choose Best Mutual Fund Scheme [In 4 Steps]

No. 7 is the best size for my shoe but it may not be the same case for you. Wait! this post is not about shoes rather the earlier statement only tries to convince you that “best” and “worst” are two relative terms.

Similarly, choosing the best mutual fund is a subjective process & only you can decide which one best suits you. Meanwhile, you must know the best practices and strategies that will help you decide on which mutual fund you should invest in.

This post talks about the crucial factors to consider while choosing a mutual funds scheme for SIP, lump sum investment etc. Considering these factors may be time-consuming but definitely worth the effort by potentially reducing risks and increasing your returns!

Sidenote! If you find the process overwhelming, don't hesitate to seek advice from a financial advisor as this is a crucial decision that can have a significant impact on your financial future.

The Importance of Choosing The Right Mutual Fund

“Money”- the shorter the word, the greater its influence. A tiny profit can excite us while a tiny loss can lead us to anxiety. Hence, financial decisions can be emotional and significantly impact your financial well-being.

This is why it is important to wisely choose the right mutual fund that aligns with your financial goals and positively impacts your financial well-being.

Well! This 4 steps comprehensive guide will help with the process of selecting the potentially best mutual fund for you.

4 steps to choose mutual funds

1. Understand Yourself First

Self-understanding is half a journey done towards selecting a best-fit mutual fund. You can self-assess yourself based on these parameters.

A. Investment Goals

Different mutual funds cater to different investment goals. So, it is crucial to identify your goal. Ask yourself “what do you want to achieve through your investments?” It can be:

  1. Wealth Creation
  2. Passive Income Stream
  3. Retirement Planning
  4. Emergency Fund
  5. Tax Planning
  6. Child’s Education
  7. Debt Repayment

B. Risk Tolerance

Risk tolerance refers to the degree of risk an investor is willing to tolerate. It depends on factors such as financial situation, age, financial goal, personal inclination etc.

To assess your risk tolerance, simply ask yourself “how much loss you can tolerate before you start feeling uneasy or uncomfortable?” For more clarity, see some examples:

  1. Aggressive– High levels of risk for potentially high returns
  2. Moderate– Balanced levels of risk to gain lower returns
  3. Conservative-Lower levels of risk to avoid any losses

C. Investment Horizon

It refers to the time duration an investor plans to hold an investment before selling it. It is also an important factor to consider while selecting mutual funds. You should ask yourself “how long do I want to hold the investment?” You can choose from:

  1. Short-Term Investment- 1 to 3 Years
  2. Medium-Term Investment- 3 to 7 Years
  3. Long-Term Investment- beyond 7 Years

D. Investment Strategy

You can invest in mutual funds in four chief investment strategies. You should decide which best suits you.

  1. Lump sum: You invest a lump sum amount in mutual funds in one go.
  2. Systematic Investment Plan (SIP): You invest a fixed amount regularly (usually monthly).
  3. Systematic Transfer Plan (STP): You invest a lump sum amount in one mutual fund & transfer a fixed amount periodically to another mutual fund.
  4. Systematic Withdrawal Plan (SWP): You withdraw a fixed amount of money at regular intervals (weekly, monthly, quarterly etc.).

2. Research & Analysis of Mutual Funds

After you are done with self-assessment, it is time for research and analysis of mutual fund schemes available. Despite having clear goals, this process might be a little time-consuming as you need to review & analyze various aspects of each fund.

A. Types of Mutual Funds

Not a single mutual fund can cater to the distinct categories of investors. This is why various types of mutual funds were invented. You should have a basic understanding of the different types of mutual funds available.

This will work like a funnel helping you only focus on relevant funds and ignore the ones that do not align with your goals. Here is a general example:

Mutual fund Selection

Further Read: Difference b/w Equity, Debt & Hybrid Mutual Funds

Once you have a clear idea of what type of mutual fund is fit for you, compile a list of mutual fund schemes in the market and start analysing them one by one.

B. Comparison of Mutual funds

Ones you have a list of mutual funds you want to invest in, it is time for you to conduct a comparison among them and filter out the best mutual fund schemes that seem promising against your investment goals and risk appetite.

You can compare them by studying their performance, consistency of performance, downside protection and other factors discussed below.

C. Performance of Mutual Fund

To start with, you need to evaluate the performance of each mutual fund scheme you are interested in. You can do it by studying the historical performance of the fund over the past few years.

It can show you a picture of how the fund has performed in different market conditions but it is to be noted that past performance does not promise similar future returns.

D. Consistency of Performance

A consistently performing fund is one that is able to generate returns over various market cycles and economic conditions, rather than just performing well during a bull market phase.

Let’s say there are two funds- fund A & fund B in a similar category.

YearFund A ReturnsFund B ReturnsBenchmark Returns
Average Returns9.6%8.6%9%

In the above table, Fund A has consistently outperformed against benchmark returns (an index used to measure a Mutual Fund’s overall performance) while Fund B has underperformed. This means Fund A is more consistent than Fund B.

E. Asset Under Management & Fund Size

Asset Under Management (AUM) means the total value of assets managed by a fund. Fund size refers to the total number of issued units of funds. Both of these can be a good indicator of a mutual fund’s popularity and liquidity.

A large AUM can mean the fund is popular among investors and has good liquidity. However, a large AUM can also be volatile, expensive to manage and challenging for fund managers to make promising investment decisions.

Hence, one should analyze other factors to study how a mutual fund has managed to perform well even with a large AUM & fund size.

F. Downside Protection

Fund managers of mutual funds use various techniques to minimize losses during market downturns & economic crises. These strategies are called downside protection strategies.

An investor should pay attention to the downside strategies of each mutual fund. It will not only help one reduce risks but can also potentially increase profits.

Some common downside protection strategies are:

  1. Asset Allocation: Diversify assets across various classes such as stock, bonds etc.
  2. Hedging: Use of derivatives to offset potential losses.
  3. Stop-loss Orders: Setting a price of individual stocks, below which the stocks get sold.
  4. Defensive Stock Selection: Select stocks that are not affected by market downturns.

3. Analysis Of Fund Manager & AMC

Here are a few things you can do to conduct an analysis of the fund manager and AMC.

  • Qualification & Experience: Look for the fund manager’s professional degrees & certifications related to finance. Additionally, give a close look at the number of years and types of funds managed by the fund manager.
  • Reputation & Track Record: Try to gather information about awards, accolades, and recognition received by the fund manager and AMC. Also, study the track record (past performance) of the fund manager.
  • Investment Philosophy & Strategy: Investors must carefully study the investment objective & investment strategy of the mutual fund to ensure they match with the investor’s investment objectives and risk tolerance.

4. Fees & Expenses

Investors need to pay attention to fees & expenses involved in mutual fund investment as they can eat into your returns and impact your financial goals.

A. Expense Ratios

It is an annual fee charged for the operating expenses. It is expressed as a percentage of the fund’s assets under management (AUM) and can range from less than 0.1% to over 2%.

B. Entry & Exit Loads

Entry load is charged when you enter a mutual funds scheme while exit load is charged when you exit the scheme before a specified period (usually annual).

C. Other Expenses

Some other expenses are transaction fees, management fees, custodial fees and accounting fees that are passed on to investors.


By now, you know which factors to consider before investing, it’s time to start investing! Remember investing in mutual funds can be rewarding but needs careful consideration and analysis to select the right mutual fund.

SIP (Systematic Investment Plan) is a popular way to invest in mutual funds. If you want to know about SIP investment, Give them a read:

  1. Guide to Start SIP Investment
  2. Guide to opening a SIP account


  1. How often should I review my mutual fund investments?

    To check if you are on the right track, you can review your investments at least once a year. You should review them more frequently during times of market volatility or changes in your personal circumstances.

  2. Can I switch from one mutual fund scheme to another?

    Yes, you can! Switching from one mutual fund scheme to another is a good idea for better management of risk and returns. However, it must be done carefully to ensure it is the right step towards your financial goal.

  3. Can I invest in mutual funds through a Demat account?

    Investors can invest in mutual funds with or without a Demat account. However, investing in mutual funds through a Demat account may attract additional charges & fees. hence, you should compare between different options.

  4. Can NRIs invest in mutual funds in India?

    Yes, NRIs can invest in mutual funds in India. It is to be noted that rules and regulations for NRIs investment may vary depending on the country of their residence and the mutual fund scheme they are interested in.

  5. How do I calculate the returns on my mutual fund investments?

    You can calculate the returns on your mutual fund investment by using this simple formula:

    Return on Investment = [(Current Value of Investment – Total Cost of Investment) / Total Cost of Investment] x 100

A commerce graduate turned a digital creator to follow his passion for writing and sharing useful & well-researched information that adds some value to people's lives.

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